Inventories You have been assigned to an agricultural client. You are not famili

Question

Inventories

You have been assigned to an agricultural client. You are not familiar with accounting for inventory in the agricultural industry. You need to do some research to familiarize yourself with the issues involved.

For each question, (1) provide the citation number (topic and subtopic) that addresses the question and (2) answer the question. Document this under the question, indenting your answer

(a) Identify the primary authoritative guidance for the accounting for inventories.

(b) Define the meaning of cost as it applies to the initial measurement of inventory.

(c) Indicate the circumstances when it is appropriate to initially measure agricultural inventory at fair value.

(d) What is a major objective of accounting for inventory?

(e) Are abnormal freight charges included in the cost of inventory?

Explanation / Answer

The questions are highly specific in nature. Therefore, explanation has been provided as and where applicable. The answers have been picked up from the relevant FASB codification. The source has been mentioned alongside the answer as and where applicable.

_________

Part A)

The primary authoritative guidance for the accounting for inventories is FASB ASC 330 (Assets).

_________

Part B)

As per the relevant accounting standard, the cost of inventory as applied to the initial measurement includes all the expenditures that have been incurred directly or indirectly in bringing the inventory to its present condition and location. For Instance, purchase price are frieght cost will be included in the cost of the inventory.

_________

Part C)

The answer has been picked up from the relevant FASB codification (FASB ASC 905–330–30–1: “Agriculture–Inventory–Initial Measurement.”) and hence, its terminology cannot be changed as it is specific in nature. Following are the circumstances when it is appropriate to initially measure agricultural inventory items at fair value:

1) They have immediate marketability at quoted market prices that cannot be influenced by the producer.

2) They have characteristics of unit interchangeability.

3) They have relatively insignificant costs of disposal.

The valuation of these types of inventory items will be based on the net realizable value which is the difference between the quoted market prices and direct disposal costs.

Source: FASB ASC 905–330–30–1: “Agriculture–Inventory–Initial Measurement.”

_________

Part D)

The objective of accounting for inventory is to ensure proper determination of net income in accordance with the relevant accounting principle of matching expenses against revenues.

Source: FASB ASC 330–10–10–1: “Inventory–Overall–Objectives.”

_________

Part E)

No, abnormal freight charges and charges such as handling costs and cost of spoiled material will not be treated as a part of the cost of inventory. These charges will be reported as current period expenses in the books of account.

Source: FASB ASC 330–10–30–7: “Inventory–Overall–Initial Measurement.”

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.