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FASB Codification: Inventory research

1. Locate the Master Glossary in the FASB Codification, and answer the following questions:

a. What is the formal definition in the glossary of the term "Inventory?"

b. ABC Company has a number of machines used for manufacturing its products. One of ABC's machine suppliers is trying to get rid of its existing machines to make room for a new model, and is offering them at a sharply discounted price. As such, ABC has decided to purchase a number of the sale-priced machines. ABC intends to retire its existing machines early and to offer them for sale. Based on the definition above, now that these machines are no longer used in production and they are held for sale, should ABC reclassify them as inventory?

2. What is the Codification topic number for inventory?

3. What types of entities are not covered by the guidance in the Inventory Topic? (Provide the Codification reference for your answer)

4. What is the objective of accounting for inventories? (Provide the Codification reference for your answer)

5. There are a number of reasons why a company might determine that it will not recover in sale the full cost that it has put into its inventory (physical deterioration, obsolescence, changes in price levels, etc.). In this situation, guidance states that the inventory must be written down to the lower of cost or market. When such a write-down occurs, it is not expected that the inventory will recover in value. However, on rare occasions inventory may recover its value prior to being sold. What is the SEC's position on accounting for this restoration of inventory value? If it becomes apparent prior to sale that inventory previously written-down will recover in value, should the inventory continue to be carried at the reduced market value? Should it be restored to the new market value (not to exceed original historical cost)? (Provide the Codification reference for your answer)

Solution Preview

a. What is the formal definition in the glossary of the term "Inventory?"

Direct cut-and-paste from codification:

"Inventory
The aggregate of those items of tangible personal property that have any of the following characteristics:
a. Held for sale in the ordinary course of business
b. In process of production for such sale
c. To be currently consumed in the production of goods or services to be available for sale.
The term inventory embraces goods awaiting sale (the merchandise of a trading concern and the finished goods of a manufacturer), goods in the course of production (work in process), and goods to be consumed directly or indirectly in production (raw materials and supplies). This definition of inventories excludes long-term assets subject to depreciation accounting, or goods which, when put into use, will be so classified. The fact that a depreciable asset is retired from regular use and held for sale does not indicate that the item should be classified as part of the inventory. Raw materials and supplies purchased for production may be used or consumed for the construction of long-term assets or other purposes not related to production, but the fact that ...

Solution Summary

Your tutorial is 594 words and includes exact quotes and citations from FASB codification.

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