Inventory defintion and cost

Inventories these are asset which are held for sale in the ordinary course of business; in the process of production for such sale or in the form of materials or supplies to be consumed in the production process or in the rendering of services.

Two types of inventories

1. Trading concern inventories is one that buy and sell goods in the same form of purchased. The term "merchandise inventory" generally applied to good held by trading concern.

2. Manufacturing concerned is the buy goods which are transform or converted in another form of goods that made before to sell. The term :"Finished goods" is refer to inventories of a manufacturing concern.


Measurement of cost for inventories

Inventory should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the cost of completion and the cost necessary to make sale. The cost of inventories should comprise all cost of purchased, cost of conversion and other cost incurred in bring the inventories in to their present location and condition.

Terms in connection with purchase of merchandise or raw materials

1. FOB destination

2. FOB shipping point

3. Freight collect

4. Freight prepaid

Inventory costing methods

Usually business entity are not able to specifically identify the unit sold and the unit remaining. A cost flow assumption must be made. cost flow is a real or assumed associate of units cost with good either sold or on hand. Assumed cost does not always reflect the actual goods flow. The generally accepted methods of inventory costing under the periodic inventory system are follows:

1. Specific identification
2. First in, First out
3. Last in, Last out
4. Weighted average cost