1150
Inventory
ASC 330: Inventory
📖 Overview
This standard prescribes accounting treatment for inventory. It permits FIFO, weighted average, and LIFO (with LIFO reserve disclosure). Inventory is measured at the lower of cost or net realizable value (or market).
🎯 Scope
This standard applies to the accounting treatment for inventory, including:
- Goods purchased for resale.
- Raw materials.
- Work in process.
- Finished goods.
Does not apply to long-term construction contracts.
⚙️ Key Principles
1. **Inventory Measurement**:
- Inventory is measured at Lower of Cost or Market (LCM).
- **Market**: Typically current replacement cost.
- Market cannot be lower than NRV minus normal profit margin, nor higher than NRV.
2. **Cost Flow Assumptions**:
- **FIFO (First-In, First-Out)**: Permitted.
- **LIFO (Last-In, First-Out)**: Permitted (with LIFO reserve disclosure).
- **Weighted Average Cost**: Permitted.
3. **Write-Down**: Inventory is written down to market when cost > market.
✅ Recognition
Inventory is recognized when purchased or produced.
Inventory cost is recognized as expense (Cost of Goods Sold - COGS) when goods are sold.
Write-down loss is recognized as an expense in the period the decline occurs.
Write-downs cannot be reversed under GAAP (unlike IFRS).
📏 Measurement
**Initial Measurement:**
- Cost includes: Purchase price, customs duties, transport, handling, and other direct costs.
- Cost excludes: Trade discounts, selling costs, general administrative expenses.
**Subsequent Measurement:**
- Inventory is measured at Lower of Cost or Market (LCM).
- **Market**: Typically current replacement cost.
- **Ceiling**: Net Realizable Value (NRV).
- **Floor**: NRV minus normal profit margin.
**LIFO Method:**
- Permitted only under GAAP.
- Requires disclosure of the LIFO reserve (difference between LIFO and FIFO inventory).
📊 Presentation
**On the Balance Sheet:**
- Inventory appears as a current asset.
- If LIFO is used, the LIFO reserve is disclosed.
**On the Income Statement:**
- Cost of Goods Sold (COGS).
- Inventory write-down losses.
**Note Disclosures:**
- Cost flow assumption (FIFO, LIFO, weighted average).
- Composition of inventory (raw materials, WIP, finished goods, merchandise).
- LIFO reserve (if LIFO is used).
- Any inventory pledged as collateral.
📝 Disclosure Requirements
Disclosures required:
- Accounting policies for inventory (cost flow assumption).
- Composition of inventory (raw materials, WIP, finished goods, merchandise).
- Total carrying amount of inventory.
- If LIFO is used: LIFO reserve (difference between LIFO and FIFO).
- Amount of inventory measured at lower of cost or market.
- Amount of inventory pledged as collateral.
- Amount of inventory recognized as expense during the period.
🔗 Related Standards
ASC 606 (Revenue from Contracts with Customers), ASC 740 (Income Taxes)
📁 Related Accounts in the Chart of Accounts
Explore accounts commonly associated with this accounting standard.