Thursday, June 18, 2009

valuing the inventory when it purchased

inventory should be recorded in the book at the amount that includes all of the costs paid for getting the inventory ready and available for sale. this includes not only the cost of the inventory itself, but also shipping costs to receive the inventory, insurance, taxes and tariffs, duties,storage and any other costs without which the company could not sell the inventory to the customer.
the journal entry to record the purchase of inventory will be as follow;
Dr inventory (all costs required)
Cr cash (all costs required)
If more than one type of inventory is purchased for only one purchase price, the cost needs to be allocated amongst the different inventories purchased, using a pro rate distribution based upon the fair value of the different items purchased.
If company receives any discounts related to the purchase of the inventory, the discounted price that it pays is the amount that should be recorded as the value of the inventory .
If the goods are shipped FOB Destination (this is covered later , but it means that the goods are considered sold only when they reach the destination), the costs of shipping are incurred by the seller and not the buyer. these shipping out costs are considered to be a selling expense by the seller and are not included in either the inventory or the costs of goods sold figure. this also means that the only cost to record as inventory by the purchaser of goods (which were shipped FOB Destination) is the cost of the goods themselves. this is because all shipping related charges were paid by the seller and were most certainly included in the single invoice amount.
Internal links
1- this link about inventory and financial statement
2- this link about classifications of inventory

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