Page 250 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes 8. ………….assumes that the relevant costs of inventory can be divided into order costs and
carrying costs.
9. In ABC Analysis ……category of items consists of only a small percentage of the total
items

11.5 Valuation of Material Issues and Inventory

11.5.1 Management Issues

1. Concept of current asset: Inventory is considered as current asset because it will normally
be sold within a year’s time or within a company’s operating cycle. For example, trading
inventory consists of all goods that are owned and held for sale in the regular course of
business. In case of manufacturing companies since they are engaged in the actual making
of the products, they have three kinds of inventory – raw materials to be used in the
production of goods, partially completed products (often called work-in-progress) and
finished goods ready for sale.
2. Matching of costs and revenues: Objective of accounting for inventories is the proper
determination of income through the matching of costs and revenues.
3. Physical flow of inventories and cost flow of materials: Physical flow of inventories has
to be differentiated with cost flow of materials.

Physical value of business materials may occur in a variety of ways. Some businesses find it
necessary to rotate their stock of inventory so that fresh goods are always available. For example,
in a paint store, the oldest cans of paint are placed at the front of the selections so that they will
sell first, preventing inventory for spoiling or deterioration with age. The methods used for
moving the inventory is first in first out (FIFO), last in, first out (LIFO) system.
Figure 11.1: Management choices in accounting for inventories

Inventory cost flows affect the value of end inventories and the amount charged to cost of goods
sold. Consequently, both the balance sheet and the income statement are affected directly by

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