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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 Statements

a. 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

User Comment
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.
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I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
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