Generally Accepted Accounting Principles
in the United States

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 Inventory Costs
(SFAS No. 151)
Amendment of ARB No. 43, Chapter 4, Inventory Pricing  

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SFAS No. 151

Statement of Financial Accounting Standards (SFAS) No. 151
Inventory Costs
        b.  Issued in November 2004
        c.  SFAS No. 151 amends ARB No. 43, Chapter 4, Inventory Pricing

ARB No. 43, Chapter 4, Para. 5

         --> Under some circumstances, items such as
                    a.  idle facility expense,
                    b.  excessive spoilage,
                    c.  double freight,
                    d.  and handling costs
               may be so abnormal as
               to require treatment as current period charges
               (rather than as a portion of the inventory cost.)
SFAS No. 151 Amends ARB No. 43, Chapter 4, Para. 5

         --> Items such as
                    a.  abnormal freight, handling costs
                    b.  and amounts of wasted materials (spoilage)
               require treatment as current period charges
               (rather than as a portion of the inventory cost.)

SFAS No. 151 requires that

         --> those items be recognized as current-period charges
               regardless of whether they meet the criterion of so abnormal.
Accounting Research Bulletin (ARB) No. 43, Chapter 4
Accounting Research Bulletin (ARB) No. 43
        a.  Restatement and Revision of Accounting Research Bulletins
        b.  Issued in June 1953

        c.  Chapters of ARB No. 43

Chapter 4:  Inventory Pricing

     Statement 1
         Inventory refers to
                 --> tangible personal property which
                       a.  are held for sale in the ordinary course of business,
                       b.  are in process of production for such sale, or
                       c.  are to be currently consumed in the production.

     Statement 2
         Objective of accounting for inventories
                 --> is the proper determination of income
                       (through the process of matching costs against revenues.)

     Statement 3
         Primary basis of accounting for inventories
                 --> is cost.

         Cost means
                 --> the sum of expenditures incurred
                       to bring an item to its existing condition and location.

     Statement 4
         Cost may be determined
                 --> under any one of several assumptions
                       as to the flow of cost factors.

         Examples of cost flow assumptions
                 --> first-in first-out
                       last-in first-out

         Objective of selecting a cost flow assumption is
                 --> to choose the one which most clearly
                       reflects periodic income.

     Statement 5
         Lower of cost or market
                 --> A departure from the cost basis is required
                 --> when the utility of goods is less than cost.

     Statement 6
         Market means current replacement cost except that:
                 --> a.  Market should not exceed the net realizable value
                            (i.e., estimated selling price - cost of completion and disposal)
                 --> b.  Market should not be less than net realizable value
                            reduced by an allowance for normal profit margin.

     Statement 7
         Lower of cost or market may be applied
                 --> a.  to each item or
                       b.  to the total of each major category or
                       c.  to the total of inventory.

     Statement 8
         The basis of inventory valuation
                 --> must be consistently applied and
                 --> should be disclosed in the financial statements.

     Statement 9
         Inventories may be stated above cost
                 --> only in exceptional cases (e.g., precious metals)

     Statement 10
         Accrued net losses on
                 firm purchase commitments for inventories

                 --> measured in the same way as inventory losses,
                 --> should be recognized in the accounts and the amounts
                       separately disclosed in the financial statement.

U.S. GAAP Codification
International Financial Reporting Standards (IFRS)
Accounting Topics
Inventory Valuation Methods
Depreciation Methods
Revenue Recognition Principle
Accrual Basis vs. Cash Basis Accounting
Basics of Journal Entries
Ratios for Financial Statement Analysis
Overview of Financial Statements

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