Sung Cho
Christy Grunebach
Abby Schweickart
Nate Slany
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Inventories are asset items that a company
holds for sale in the ordinary course of
business, or goods that it will use or consume
in the production of goods to be sold.
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Merchandise
Inventory
Raw Materials
Inventory
Work In Process
Inventory
Finished Goods
Inventory
Merchandising Company
Wal-Mart
Balance Sheet
31-Jan-04
Current assets (in millions)
Cash and cash equivalents
Receivables
Inventories
Prepaid expenses and other
Total current assets
$
5,199
1,254
26,612
1,356
$
34,421
Manufacturing Company
Caterpillar
Balance Sheet
31-Dec-04
Current assets (in millions)
Cash
Accounts Receivable
Inventories
Raw materials
Work in process
Finished goods
Supplies
Total inventories
Other current assets
Total current assets
$
$
445
13,969
1,592
664
2,209
210
4,675
1,767
$ 20,856
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The physical goods to include inventory
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The costs to include in inventory
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The cost flow assumption to adopt
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Goods in Transit
Consigned Goods
Special Sales Agreements
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Product Costs- Those costs that “attach” to
the inventory.
Period Costs- The costs that are indirectly
related to the acquisition or production of the
goods.
Treatment of Purchase Discounts
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Specific Identification- Identifying each item sold and
each item in inventory.
Average Cost-Prices items in the inventory on the basis
of the average cost of all similar goods available during
the period.
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FIFO (First in, First out)
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LIFO (Last in, First out)
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The cost flow used goes under the “Significant
Accounting Policies” on the disclosures

Amends ARB No. 43 chapter 4 “Inventory
Pricing”
“..under some circumstances items such as idle
facility expense, excessive spoilage, double
freight and rehandling costs may be so
abnormal as to require treatment as current
period charges...”
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Changes Made to ARB No. 43:
1. Those items must be recognized as current
period charges regardless of whether they
meet the criterion of “so abnormal”
2. Allocation of fixed production overheads to
the costs of conversion be based on the
normal capacity of the production facilities
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Variable overhead costs of production are
allocated on the basis of actual use
Fixed overhead costs of production are
allocated on the basis of normal capacity
◦ Normal Capacity: Production expected to be
achieved over a period
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Unallocated overheads are recognized as an
expense in the period in which they are
incurred
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16. Current cost amounts of inventory and
property, plant, and equipment are
measured as follows:
a. Inventory at current cost or lower
recoverable amount at the measurement date

The current cost of inventory is the current
cost to purchase the inventory or the current
cost of the materials required to produce the
good (including some overhead expenses
that are allowed under GAAP).
a. Indexation
(1) Externally generated price indexes for the class
of goods or services being measured
(2) Internally generated price indexes for the class
of goods or services being measured
b. Direct pricing
(1) Current invoice prices
(2) Vendors’ price lists or other quotations or
estimates
(3) Standard manufacturing costs that reflect
current costs.
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Historical cost
◦ Property, plant, and equipment and most
inventories are reported at their historical cost,
which is the amount of cash or its equivalent, paid
to acquire an asset, commonly adjusted after
acquisition for amortization or other allocations.
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Current cost
◦ Some inventories are reported at their current cost,
which is the amount of cash, or its equivalent, that
would have to be paid if the same of an equivalent
asset were acquired currently.
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The increase or decrease in the current cost
amount of inventory represents the difference
between the measures of the assets ate their
entry dates for the year and the measures of
the assets at their exit dates for the year (FAS
89 ¶34).
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For the current year
◦ The changes in current cost amount of inventory is
reported both before and after eliminating the
effects of general inflation.
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In the five-year summary
◦ Increase or decrease in the current cost and net of
inflation for each of the five most recent years.
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December 31, 19x5
◦ 1,000,000 units, $58,000,000 of historical cost
◦ Current cost is $58/unit
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December 31, 19x6
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◦
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900,000 units, $65,700,000 of historical cost
Current cost is $73/unit
3,036,000 units produced
3,136,000 units sold
Consumer Price Index for All urban Consumers
◦ December 19x5 : 292.4
◦ Average 19x6
: 298.4
◦ December 19x6 : 303.5
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Current Cost of Inventory and Cost of Goods
Sold (for 19x6)
Current cost at the beginning of year
Current cost at the end of year
$58/unit
73/unit
$131/unit
Average current cost ($131/2)
Units sold during the year
Average current cost goods sold
$65.5/unit
X 3,136
$205, 408