Inventory Valuation

1838 Words Jun 16th, 2008 8 Pages
Inventory Valuation

Retailers define inventory as intended sellable assets consisting of goods that are available for resale to customers. Manufacturers also maintain three components of inventory. These include “finished goods” which are goods that have been completed and are awaiting sales. Manufacturers may also have “work in process inventory” made up of goods being manufactured but not yet completed. The third category of inventory is “raw materials,” consisting of goods that are to be used in producing products. Overall, inventory should include all costs that are both ordinary and necessary to put the goods in place and in condition for their resale. For many companies, what they have in inventory represents a major
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To properly use the cost method in valuing your property, all direct and indirect costs associated with it must be applied. Some general rules apply to the cost method including that for merchandise on hand at the beginning of the tax year, cost means the inventory price of the goods. Also, for any merchandise purchased during the year, cost means the invoice price less discounts plus freight and other charges occurred in acquiring the goods. For any merchandised produced during the year, cost means all direct and indirect costs that have to be capitalized under the uniform capitalization rules (UNICAP). Under UNICAP, you must capitalize the direct costs and partial indirect costs for production or resale activities subject to these rules. Rather than claiming these costs as a current deduction, you include them in the basis of property your produce or acquire for resale. You recover these costs through depreciation, amortization, or cost of goods sold when you use, sell, or dispose of the property. Under the lower of cost or market method, compare the market value of each item on hand on the inventory date with its cost and use the lower value of its inventory value. This method is applied to goods purchased and on hand and basic elements of cost of goods being manufactured (direct materials, direct labor). This method does not apply to goods accounted for under the LIFO method. To

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