ASC 330, or Accounting Standards Codification Topic 330, is titled "Inventory." It provides guidelines and principles for accounting and reporting related to inventory for various types of businesses. Inventory includes items that a company holds for sale in the ordinary course of business, in the process of production, or in the form of materials or supplies to be consumed in the production process. Here's a summary of the key points covered in ASC 330:

• Measurement and Recognition: Inventory is generally recorded at the Lower of Cost or Market value (LCM). Cost can be determined using methods like specific identification, first-in, first-out (FIFO), weighted average, or last-in, first-out (LIFO). Market value is the replacement cost or net realizable value, whichever is lower.​

  • Lower of Cost or Market (LCM) is a method used to value inventory. The basic premise is to record inventory at the lesser of two values: its original cost or its current market value. This ensures that inventory isn't overvalued on the financial statements.

    • Cost: This refers to the original cost of the inventory. It's how much was paid to produce or purchase that inventory.

    • Market: This refers to the current replacement cost (how much it would cost to replace the inventory item today) or the selling price in the ordinary course of business, depending on the context. Typically, it's the current replacement cost that's considered.

  • Simplified:

    • Imagine you have a store that sells laptops. You bought a laptop last year for $1,000 (its original cost). Now, a newer model has been released, and the market value of the laptop you have in inventory has dropped to $800.

    • Using the Lower of Cost or Market rule:

    • The cost is $1,000.

    •  The market value is $800.

  • Since $800 is lower than $1,000, you would record the laptop in your inventory at the reduced value of $800.

  • The rationale behind this approach is to ensure that assets (like inventory) aren't over-stated on the balance sheet, which in turn ensures that potential losses are recognized in a timely manner. If you kept valuing the laptop at $1,000 even though its market value dropped, it could give a misleadingly optimistic picture of the company's financial health.

• Cost Components: Inventory costs include more than just the purchase price. Direct costs, such as labor and material, that are necessary to bring the inventory to its present condition and location are also included.

• Inventory Types: ASC 330 distinguishes between various types of inventory, including finished goods, work in progress, and raw materials. Each type has specific guidelines for valuation and recognition.

Finished Goods:

• Finished goods are completed products that are ready for sale to customers.

• The cost of finished goods includes all direct costs associated with production, such as labor, materials, and overhead.

• Finished goods are typically valued at the lower of cost or net realizable value.

Work in Progress (WIP):

• Work in progress represents products that are partially completed but are still undergoing production processes.

• The cost of WIP includes direct materials, direct labor, and a portion of overhead costs.

• Valuation of WIP involves estimating the percentage of completion and applying these costs accordingly.

• WIP costs are accumulated and transferred to finished goods when the production process is completed.

Raw Materials:

• Raw materials are the basic components used in the production process.

• The cost of raw materials includes their purchase price, transportation costs, and any other costs directly associated with getting them to the production facility.

• Raw materials are generally recorded at cost until they are used in the production process.

Supplies and Consumables:

• These items are not intended for sale but are used in the production process or to support operations.

• Examples include maintenance supplies, office supplies, and cleaning materials.

• These items are typically recorded at cost and expensed as they are consumed.

Goods Held on Consignment:

• Consignment goods are goods that are still owned by the consignor (supplier) but are placed with a consignee (seller) for potential sale.

• The consignee does not own the goods until they are sold to a third party.

• Consignment goods are not recognized as inventory by the consignee until they are sold.

Goods in Transit:

• Goods in transit are items that have been shipped but have not yet reached their destination.

• The determination of whether goods are included in inventory depends on the terms of the sale, ownership transfer, and the specific shipping terms (e.g., FOB Shipping Point or FOB Destination).

Biological Assets:

• In industries like agriculture, ASC 905 provides guidance on accounting for biological assets such as crops and livestock.

• Biological assets are measured at fair value less costs to sell if they are agricultural produce harvested from an entity's biological assets.

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• Net Realizable Value: If the cost of inventory exceeds its net realizable value (estimated selling price less costs to complete and sell), a write-down is required to reduce the value to the lower net realizable value. If you can't sell something for as much as you originally paid, after considering all selling expenses, you need to lower its value in your books to reflect the amount you can realistically get

• Inventory Cost Flow Assumptions: Entities can choose between various cost flow assumptions, such as FIFO, LIFO, and weighted average, to determine the cost of goods sold and ending inventory. However, LIFO is not allowed under International Financial Reporting Standards (IFRS).

1. FIFO (First-In, First-Out):

   • FIFO assumes that the oldest items in inventory are the first ones sold.

   • When calculating the cost of goods sold, it uses the cost of the oldest items in stock.

   • This method is straightforward and often results in a better reflection of current market prices.

2. LIFO (Last-In, First-Out):

   • LIFO assumes that the most recently acquired items are the first ones sold.

   • It uses the cost of the newest items to calculate the cost of goods sold.

   • LIFO can result in lower taxable income during periods of rising prices but may not reflect current market costs accurately.

3. Weighted Average:

   • The weighted average method calculates the average cost of all items in inventory.

   • It's obtained by dividing the total cost of all items by the total quantity of items.

   • This method smooths out cost fluctuations and is easy to calculate but might not provide precise cost information for specific items.

4. Specific Identification:

   • Specific identification assigns the actual cost of each individual item in inventory to the cost of goods sold.

   • It's practical when dealing with unique or high-value items where each item's cost is known.

   • Provides precise cost matching but might be complex and only applicable to certain businesses.

5. Standard Cost:

   • Standard cost uses predetermined cost values for materials and production processes.

   • Actual costs are compared to these standards, and variances are analyzed.

   • This method offers cost control insights but requires accurate predictions of costs.

• Disclosure Requirements: Companies must disclose the basis of accounting for inventory (such as cost flow assumption), the total carrying amount of inventory, and any amounts recognized as an expense during the period.

• Lower of Cost or Market Rule: The lower of cost or market (LCM) rule requires that if the market value of inventory is lower than its cost, the inventory should be written down to the lower market value.

Example:​ Company ABC has an inventory of Widgets. The cost of the Widgets is $10,000. Due to market conditions, the current replacement cost (market value) for these Widgets is only $8,000.

Journal Entry:

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The "Loss on Inventory Write-down" account can be an expense account in the income statement that captures the amount of the write-down. This decreases the net income for the period.

The "Allowance to Reduce Inventory to LCM" account is a contra-asset account, which means it's paired with the Inventory account on the balance sheet to show the adjusted value of inventory. After this entry, the net book value of inventory would be $8,000 ($10,000 original cost - $2,000 allowance).

By using this method, the inventory remains on the books at cost ($10,000) but is shown net of the allowance on the financial statements, reflecting the lower market value ($8,000).

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• Exclusions and Exceptions: Certain industries or circumstances might have specific exceptions or rules related to inventory accounting. For example, agricultural products, precious metals, and biological assets might have specialized guidance.

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Inventory Flow Examples:

Purchase Assumptions:

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Sales on Day 3: Sold 15 apples.

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FIFO (First-In, First-Out)

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Summary for FIFO:

• Cost of Goods Sold (COGS): $17.50

• Remaining Inventory Value: $22.5

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LIFO (Last-In, First-Out)

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Summary for LIFO:

• Cost of Goods Sold (COGS): $22.50

• Remaining Inventory Value: $17.50

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Weighted Average

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Summary for Weighted Average:

• Cost of Goods Sold (COGS): $19.95

• Remaining Inventory Value: $19.95

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Standard Cost

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Summary for Standard Cost:

• Cost of Goods Sold (COGS): $18.75

• Remaining Inventory Value: $18.75

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Specific Identification

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Summary for Specific Identification:

• Cost of Goods Sold (COGS): $18.50

• Remaining Inventory Value: $21.50

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