Accounting for Inventories

Case Solution

Fernando Penalva, Marc Badia Castella

Inventories are one of the basic investments that a company must make. Businesses that sell tangible products typically need to keep a few units in stock to fulfill customer orders. These units are sold at a higher price than their original cost, which generates a profit. Obviously, financial accounting should reflect such an important economic activity. This note explains how inventories are recorded and valued in trading and manufacturing companies. It begins with the initial registration and registration of inventory sales. The note then describes how inventories will deteriorate using the lowest value principle as well as inventory tracking methods (i.e. FIFO, weighted average cost, and LIFO). Finally, the note explains how inventory levels are taken into account in manufacturing companies with the help of total cost accounting.

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