INVENTORY

Inventory is defined as tangible personal property

1. held for sale in the ordinary course of business,
2. in the process of production for such sale, or
3. to be used currently in the production of items for sale.

Determining Inventory and Cost of Goods Sold

1. The primary basis of accounting for inventories is cost, which includes the cash or other fair
value of consideration given in exchange for it.

2. The units to be included in inventory are those which the firm owns; ownership is usually
determined by legal title.

3. The costs to be included in inventory include all costs necessary to prepare the goods for sale.
Normal costs for freight-in, handling costs, and normal spoilage are included in inventory.

4. Any abnormal costs for freight-in, handling costs, and spoilage are treated as current
period expenses, and are not allocated to inventory.

5. Interest on inventories routinely produced, or repetitively produced in large quantities, is not

capitalized as part of inventory cost.

For a merchandising concern, the costs to be included in inventory include the purchase price of
the goods, freight-in, insurance, warehousing, and any other costs incurred in the preparation of
these goods for sale.
Example #1
On December 15, 2019, Gyomei purchased goods costing $100,000. The terms were FOB shipping
point. The goods were received on December 17, 2019. Costs incurred by Gyomei in connection
with the purchase and delivery of the goods were as follows:

Normal freight charges $3,000

Handling costs 2,000
Insurance on shipment 500
Abnormal freight charges for express shipping 1,200

What is the amount of inventory?

What is the amount of current period expense?

Example #2
The following information pertained to Sanemi Co. for the year:

Purchases $102,800
Purchase discounts 10,280
Freight in 15,420
Freight out 5,140
Beginning inventory 30,840
Ending inventory 20,560

What amount should Sanemi report as cost of goods sold for the year?
Inventory is defined as tangible personal property
6. held for sale in the ordinary course of business- for example, the business entity is FORD MOTOR COMPANY. Ford motor is an automaker company. Its cars, SUVs and trucks for sale are
considered as inventory.
7. in the process of production for such sale, or- for example, the steel, aluminum, plastics and rubber currently in production process of Ford Motor for the production of cars, SUVs and trucks are
considered inventory.
8. to be used currently in the production of items for sale for example, the stocks of unused steel, aluminum, plastics and rubber currently in Ford Motor’s warehouse to be used on production
process of Ford Motor are considered inventory.

Determining Inventory and Cost of Goods Sold

1. The primary basis of accounting for inventories is cost, which includes the cash or other fair value of consideration given in exchange for it.

2. The units to be included in inventory are those which the firm owns; ownership is usually determined by legal title.

3. The costs to be included in inventory include all costs necessary to prepare the goods for sale. Normal costs for freight-in, handling costs, and normal spoilage are included in inventory.

4. Any abnormal costs for freight-in, handling costs, and spoilage are treated as current period expenses, and are not allocated to inventory.

5. Interest on inventories routinely produced, or repetitively produced in large quantities, is not capitalized as part of inventory cost.

For a merchandising concern, the costs to be included in inventory include the purchase price of the goods, freight-in, insurance, warehousing, and any other costs incurred in the preparation of these
goods for sale. Take note that The cost of freight-in, insurance, warehousing, and any other costs must be normal.

Example #1
On December 15, 2019, Gyomei purchased goods costing $100,000. The terms were FOB shipping point. The goods were received on December 17, 2019. Costs incurred by Gyomei in connection
with the purchase and delivery of the goods were as follows:

Normal freight charges $3,000

Handling costs 2,000
Insurance on shipment 500
Abnormal freight charges for express shipping, 1,200

What is the amount of inventory? (100+3+2+.5) 105.5

What is the amount of current period expense? 1.2

Example #2
The following information pertained to Sanemi Co. for the year:

Purchases $102,800
Purchase discounts 10,280
Freight in 15,420
Freight out 5,140
Beginning inventory 30,840
Ending inventory 20,560

What amount should Sanemi report as cost of goods sold for the year? BI+Purchases-Purchase rets and allowance-purchase discounts+freight in-EI= COGS/ COST OF SALES 118,220