Inventories

Accounting of Inventories

Inventories is a technical word used for stock. inventories form an important part of business and change in value of inventories has direct effect on profit . for example the amount of closing stock is overstated by 100 $ means one have overstated the profit by $ 100. therefore inventories is considered to be one of the major area of manipulation of accounts.
Cost of inventories include the purchase cost, cost of conversion and other cost to bring the inventories to business location. cost of purchase includes the invoice price minus trade discount, inward transportation, handling cost, custom duties and other direct taxes. Cost of conversion directly allocated cost and systematically allocation of variable and fixed production overhead cost.
Types of costs not form part of inventories

1. Storage Cost other than important as production processes
2. Selling Cost
3. Wastage or Error Cost
4. Administrative handling

Example of Storage cost
Mr. A is engaged in production of ice cream and cold storage expense cost 2 $ per cup of ice cream. Mr. A will include this cost as inventory cost and cold storage is important element of production process.
Types of inventories
The main types of inventories are as under

1. Raw Material to be used in production
2. Work in progress
3. Finished Good
4. Tools and supplies

Measurement of inventories
Inventories are measured at lower of cost or Net realizable value. Normally the net realizable value is selling price , however, the exact definition is selling price minus cost of completion an necessary expenses to sell.
Examples of NRV
Mr. A has inventory of washing machines 100 each cost 100 , however, Mr. A expect that he could only sale the machines for 80 $ each. in this case the inventories would be value at 8,000 ( because selling price is lower than cost)
Mr. A has inventory of washing machines 100 each cost 100 , however, Mr. A expect that he could only sale the machines for 80 $ each , furthermore,Mr. A is required to install a new timer in the washing machine as per the market demand and without such timer there is fair chances that machines can not be sold. in this case the inventories would be value at 6,000 ( because selling price is lower than cost 8,000- 2,000 cost necessary to make sale)