Which of the following goods shall be included in the inventory account of an entity
Businesses purchase inventory to sell to their customers at prices greater than what they paid to supply it. Most of the time inventory only includes what is physically in the store or warehouse. As reported by Accounting Coach, a manufacturing organization has inventory in the form of raw materials, work-in-process and finished goods. However, sometimes it can be more difficult to determine what to include in inventory counts when goods are in transit, inventory on consignment or if there have been sales returns. Show
Goods in TransitMost businesses determine what to include in inventory at the end of the accounting period. The last day of the period is the inventory cutoff date. Establishing an inventory cutoff date is important when there are goods in transit between the business and its customers, or between the company and its suppliers. For example, a business ordered inventory on Dec. 28 and received it on Jan 3. If the inventory cutoff date is Dec. 30, the inventory in transit should be included in the company's financial statements. Shipment TermsThere is an exception. When goods are in transit, it's important to note the terms of the shipping agreement. The term 'FOB' denotes Free on Board; According to Corporate Finance Institute, the term FOB is used to determine whether the seller or buyer is legally liable for the goods in shipment and their damages. If the inventory is shipped free on board shipping point, the business is the legal owner of the inventory as soon as the supplier ships it. Ownership passes to the buyer when purchased goods are received from the public carrier. The business should include the shipment in its inventory count if it is shipped by the inventory cutoff date. If the inventory is shipped free onboard destination, the business is not the legal owner of the inventory until it actually reaches the business. It should include the shipment in its inventory count only if it receives the shipment by the inventory cutoff date. Inventory on ConsignmentWhen a business arranges for another business to sell its products while still retaining ownership, it is selling under consignment. The consignor transfers the inventory to the business (the consignee), but the consignor retains legal title. If the consignee can't sell the products, it returns them to the consignor. If it sells them, it remits the selling price to the consignor and takes a commission. Products held on consignment are included in the consignor's inventory, not the consignee's, even though they are not in the consignor's physical possession. Sales ReturnsMost buyers have the right to return merchandise. It can be difficult to accurately count sales returns and include them in inventory. In these situations, the sellers must estimate how many returns will be made. The sellers have to do this before they can record revenue. The sellers must also assign value to the returns that it estimates will be made. Businesses include the cost of merchandise that it anticipates will be returned by the inventory cutoff date in its inventory count. The objective of IAS 2 is to prescribe the accounting treatment for inventories. It provides guidance for determining the cost of inventories and for subsequently recognising an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories. ScopeInventories include assets held for sale in the ordinary course of business (finished goods), assets in the production process for sale in the ordinary course of business (work in process), and materials and supplies that are consumed in production (raw materials). [IAS 2.6] However, IAS 2 excludes certain inventories from its scope: [IAS 2.2]
Also, while the following are within the scope of the standard, IAS 2 does not apply to the measurement of inventories held by: [IAS 2.3]
Fundamental principle of IAS 2Inventories are required to be stated at the lower of cost and net realisable value (NRV). [IAS 2.9] Measurement of inventoriesCost should include all: [IAS 2.10]
IAS 23 Borrowing Costs identifies some limited circumstances where borrowing costs (interest) can be included in cost of inventories that meet the definition of a qualifying asset. [IAS 2.17 and IAS 23.4] Inventory cost should not include: [IAS 2.16 and 2.18]
The standard cost and retail methods may be used for the measurement of cost, provided that the results approximate actual cost. [IAS 2.21-22] For inventory items that are not interchangeable, specific costs are attributed to the specific individual items of inventory. [IAS 2.23] For items that are interchangeable, IAS 2 allows the FIFO or weighted average cost formulas. [IAS 2.25] The LIFO formula, which had been allowed prior to the 2003 revision of IAS 2, is no longer allowed. The same cost formula should be used for all inventories with similar characteristics as to their nature and use to the entity. For groups of inventories that have different characteristics, different cost formulas may be justified. [IAS 2.25] Write-down to net realisable valueNRV is the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated costs necessary to make the sale. [IAS 2.6] Any write-down to NRV should be recognised as an expense in the period in which the write-down occurs. Any reversal should be recognised in the income statement in the period in which the reversal occurs. [IAS 2.34] Expense recognitionIAS 18 Revenue addresses revenue recognition for the sale of goods. When inventories are sold and revenue is recognised, the carrying amount of those inventories is recognised as an expense (often called cost-of-goods-sold). Any write-down to NRV and any inventory losses are also recognised as an expense when they occur. [IAS 2.34] What goods are included in the inventory account?inventory, in business, any item of property held in stock by a firm, including finished goods ready for sale, goods in the process of production, raw materials, and goods that will be consumed in the process of producing goods to be sold.
Which of the following is included in inventory of the company?Raw materials, semi-finished goods, and finished goods are the three main categories of inventory that are accounted for in a company's financial accounts.
Which of the following shall be included in the cost of inventories?The cost of inventories shall comprise all costs of purchase, cost of conversion and other costs incurred in bringing the inventories to their present location and condition.
Which items are not included in inventory?Change in sales during the year is not a part of the inventory.
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