- CFA Exams
- Level I 2020
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 25. Inventories
- Subject 1. Cost of Inventories
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Subject 1. Cost of Inventories PDF Download
There are two basic issues involved in inventory accounting:
1. Determine the cost of goods available for sale: Beginning Inventory + Purchases.
2. Allocate the cost of total inventory costs (cost of goods available for sale) between two components: COGS on the income statement and the ending inventory on the balance sheet. Note that COGS = (Beginning Inventory + Purchases) - Ending Inventory. The cost flow assumption to be adopted includes specific identification, average cost, FIFO, LIFO, etc. This issue will be discussed in subsequent subjects.
Determination of Inventory Cost
IFRS and SFAS No. 151 provide similar treatment of the determination of inventory costs.
The cost of inventories, capitalized inventory costs, includes all costs incurred in bringing the inventories to their present location and condition.
- It includes production costs, invoice price (net of discount), transportation costs, taxes, part of fixed production overhead, etc.
- It does not include all abnormal costs incurred due to waste of materials, abnormal waste incurred for labor and overhead conversion costs from the production process, any storage costs, or any administrative overhead and selling costs. These costs are typically expensed in the accounting period instead of being considered inventory costs.
Learning Outcome Statementsa. distinguish between costs included in inventories and costs recognised as expenses in the period in which they are incurred;
CFA® Level I Curriculum, 2020, Volume 3, Reading 25
User Contributed Comments 1
|choas69||i thought cost flow assumption includes LIFO FIFO and WAC, but specific identification matches costs with the actual physical flow of goods.
please i need someone to clarify this to me.