Accounting for Inventory
Question: Accounting for inventory seems particularly complicated. A logical approach to the coverage here
is needed. In coming to understand the reporting methodology that is utilized with this asset, where should the
discussion begin?
What is the first issue that an accountant faces in establishing an appropriate balance for inventory so that it is
reported in conformity with U.S. GAAP?
Answer: The study of inventory and its financial reporting should begin by defining “cost.” In acquiring each
item, officials make the decision to allocate a certain amount of scarce resources. What did the company expend
to obtain its inventory? That is a reasonable question to address.
To illustrate, assume that a sporting goods company (Rider Inc.) acquires a new bicycle (Model XY-7) to sell.
Rider’s accounting system should be designed to determine the cost of this piece of inventory, the sacrifice that
the company chose to make to obtain the asset. Assume that a price of $250 was charged by the manufacturer
(Builder Company) for the bicycle and the purchase was made by Rider on credit. Rider spends another $9 to
transport the item from the factory to one of its retail stores and $6 to have the pieces assembled so that the bicycle
can be displayed in the salesroom for customers to examine.
