FAR, Financial Accounting and Reporting
Sources for Inventory
Last reviewed
The standards and authorities behind PocketCPA's FAR lessons on Inventory. The topic rests on ASC 330.
About this topic
Inventory is what a company has bought or built and not yet sold.
More precisely, it is the asset a company holds for sale in the ordinary course of business, together with the materials and work in process that will become those goods.
Key points
- Inventory is measured at the lower of cost or net realizable value (NRV) under FIFO and weighted average; lower of cost or market under LIFO.
- Under the market method (LIFO/retail), market is replacement cost bounded by a ceiling (NRV) and floor (NRV minus normal profit).
- Freight-in is inventoriable; freight-out, abnormal spoilage, and G&A are period costs.
- A write-down to NRV is recognized as a loss; under GAAP, recovery of a prior write-down is not permitted except at interim dates.
What the lessons cover
- What costs are capitalized into inventory (ASC 330-10-30-1)
- Which goods belong in the count
- Cost-flow assumptions (ASC 330-10-30-9)
- Periodic versus perpetual systems
- Subsequent measurement: LCNRV versus LCM (ASC 330-10-35)
- Estimating inventory: gross profit and retail methods
- LIFO reserve and LIFO liquidation
Authoritative references
ASC 330-10-20, the definition of net realizable value: estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation.
ASC 330-10-30, the allocation of fixed overhead on the normal capacity of the production facilities.
ASC 330-10-30-1, the costs capitalized into inventory.
ASC 330-10-30-8, selling expenses and general and administrative expenses as period charges, except any portion clearly related to production.
ASC 330-10-30-9, the cost-flow assumptions.
ASC 330-10-30-12, standard costs, acceptable only when adjusted at reasonable intervals to approximate a recognized basis.
ASC 330-10-35, subsequent measurement: lower of cost and net realizable value versus lower of cost or market.
ASC 330-10-35-1B, the rule of lower of cost and net realizable value for inventory measured by methods other than LIFO and the retail inventory method.
ASC 330-10-35-1C, the older lower of cost or market rule that survives for LIFO and the retail inventory method.
ASC 330-10-35-2 through 35-5, why a loss of utility is charged against the period, and the narrative guidance on utility, replacement cost, and the normal-profit exception.
ASC 330-10-35-9 and 35-10, the practice of applying the test item by item, and the category-level total where more than one major category exists.
ASC 330-10-35-14, the new cost basis after a write-down, with reversals prohibited under US GAAP.
ASC 330-10-35-17 and 35-18, a net loss on a firm, uncancelable and unhedged purchase commitment recognized in the current period, and the firm sales contract that means there is no loss.
ASC 330-10-50-5, separate disclosure of that loss in the income statement.
ASC 330-10-50-1 and 50-2, disclosure of the basis of stating inventories, applied consistently, and of substantial and unusual losses.
How PocketCPA uses these sources
Every lesson is written in original words and cites the paragraph each rule comes from. No standard's text is reproduced. How lessons and questions are written and checked is set out in our methodology.