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INVENTORY VALUATION in ACCOUNTING Lames D. Bridwell a Thesis Submitted to the Faculty of the Department of Business Ad Inventory valuation in accounting Item Type text; Thesis-Reproduction (electronic) Authors Bridwell, James Donald, 1918- Publisher The University of Arizona. Rights Copyright © is held by the author. Digital access to this material is made possible by the University Libraries, University of Arizona. Further transmission, reproduction or presentation (such as public display or performance) of protected items is prohibited except with permission of the author. Download date 08/10/2021 18:25:05 Link to Item http://hdl.handle.net/10150/319185 INVENTORY VALUATION IN ACCOUNTING lames D. Bridwell A Thesis submitted to the faculty of the Department of Business Administration in partial fulfillment of the requirements for the degree of Master of Science in the Graduate College University of Arizona 19 4 9 Approved: irector of/ D a't'e : - ;(S,: Xa 'IHTimWTIOH i p .o 1 i: Def imitiqm of Inventories * . & , 2 ; ■ ' , Need for Inventories c „ « c o . » » o- e 3, : ■ : . , Internal Eevenue Code , . « „■ '■« .6 3 /- 'Jv- - ; • Include in Inventory 0' 0 » „;«■ \ 4 - 1/ I Kinds'of 'Inirentories ,■■ .-Vf'.:. o f ov.^ a „ i;; 5 . ' 'j- :.:' . Importance of -Inventory Valuation » * » o 6 • . - • ! - Regulations Pertaining to inventory • f : V - ■ iV: . Valuation «, f® /v -o-'. o:: » f,;- «. V ve: -.ov .:' 7 - . ■ Internal Revenue Code . „ , « e » „ « 0 8 ' 1 1 , ^ Purpose of Thesis u « o- » ; o o' > .-s-.o . » 0. 10 • . .. - lie C.0Sf:.:iiSIS;::;^f:l'.:6 . ^ o::::o ye/ ,1.0 .o: If -11 ^ . Determining. Cost 0 If f' v'-f g. o . , »-u: if if if -13.'' : : . f Incidental Costs o e> , .f-,. ,-oN f : = ^'o; <, 14 f I- f . f ’::- f r . Purchase Discounts « ,1' of o' ». f . o' , 'o'f, of- 13- • • Specific Costs. 0 .0 . „ .• . » . e . «' 16 . ' Average Methods . ..•■o- * V 0;: o""'f :=: >17 ": f ff .yfff.f - ■ Straight Average « o'.' » f o, o/Vof f,-e; f- 17 .: .: Weighted Ave'rage'y'o 'A i : » A = 0 o * .. :f 1$: ;ff ;f . , ::. .■ ' : Moving Average ;-o« Co-:: .. v.:->>■ f u . »' of'I. " f ' : :f f", • PIrst-in$yplrst"Out Method/.^o . 0 v,» .. o-ff »f <f ,f 2 1 yy.\f': f A- ; ' f:• ' ' ’ Actual:Physical:.iMdyementvand Assumed f . / : f f" Order:of Use ». « y l « » « :« « f> « 22 y :.y f yf • Profit Realization, o- ,f 0, of, l.f, o o f f -22’' " ’ : ;:f f: -f Advantages c A »fo: « ii o.: o:'..o .ol-., «; , f 0 24 "f-ff i :;:- ; f ' f . flast”ins' First-out 'Method ». '«■ -» v*. A : ofl-fRg. ■. f. ' ' Actual Physical Movement -and Assumed: ' ■: • : f'/ if ff Order of Use f, f- 0 f f. f ■ , ? • »:: o-' c 26 . fff-ff' ■ ’ Profit Realization e » c A .=. » o. > . «, » 27 : - f ;. ect'-.onf!PerlQdie :'Dos.t;- f „ ■« » « , .. » . 30 . f:v -., ff;.: Taxable income » » = y.',.f f '*':.:f.:< 33 ' : f " 'ff Asset Valuation ■» » ffvy.f-f 0-0 » of, .» 35 f.':’ : ; :: Balance Sheet - „ , „ f f « , « » » « o f 3.7 f . -. f ,.■ Internal Revenue Code » . o' ., 0.0 »:.• = 38 ff, ’ ’ ;f . Involuntary Liquidation and Replacement, fy, ; f fffy "f';:'; ' \ f:: .. '4:.;if: .''ff of Inyentofy:' 0.0 A «f o . .off of o. 'f • 51 sff;fvff f -. ■: .. ' Controlling Taxes by Last-ins First-out f " . f’ : ■' f;ff';-- . ■ • ff ■ ' M e t h o d ; u f : f y*:.. f.. « f o » .0" » 54 . ; ' examples. o o * .© ' o ' © « ■«*:• © © ® © © © @ 54 3ftF!§"": ■ /f:' y Chapter ^ : Page} '/ ; IIP ' ;(eontv.i:' : , ; ' : ■ - :-r,' V ;' • r '■> 'v^'t;v Ihe Base .Staek ifethod : , «, o e * v e 5? } Standard Cost Method. »: / » s « e t o o, ^ e © 6 .0 ■ : : Costs Incurred in Productiona » .. „ „ 61 COST- MSIS' : o „ « :o : t > ° . ; 64h COST OR . IBEKET, IHICHBTO IB L01ER , BASIS tt3 d » 66 Internal Revenue Code „ „ „ «, . <, -» c P . ; 66" Aoecmnting Procedure <= :Direct Inventory. .; ' Re due ti oh 0 - "»'V o ‘.» .«=.>''» « 0 «. 69 Manufacturing; Inventories' 0 «. > .-■« 'o o 72 Oh^e ctrons o & » © o © © © © © © - © © - © © -S o 77 lower of Cost or Market and Comparative - . In.c ome © © © © © © © © © © © © © © 81 ■ i^.ef e.hiSe ?\< © © ; © ■ © © © ©;i © i -©, © . © - -’© - © .© © o . 84 iBj3cais.ple s ©: © © © © © © © © © © © © ©. © © > 84 I M H T O R f ■ VALUATION BASRD OR SBLLlRC PRICE o © 86-: Joint-Cost -Products ©' © © ©. © ©. „ -© © ©,-:7©: o ■ W d . Inventories Ah. .Extractive lines © :© . © } ©:■" 0 '. O .. 89 ; Inventories in the Construction'Eield - © -e © 91 Internal Revenue Code © © © © © © . © © D © 94 Cross Prof it Method. © » '© © :©. © © ©. ©.; ...-■©. -© 95 . -. Invehtory Shrinkage^ Deterioration^ and. ' ; Ohsoleseehee:: © ;,;©■• ' ©' © . „ ';©:. " ©-v © © ; © ' ©...-'© O 97 Trade-ins and Repossessed Merchandise A ; o - . 97 • Scraps © © © © © © © © - © © © © - © © © © .-.-©. Q V.©; 98 . internal Revenue Code.. ©.» © © © © © Q. o 98- Retail Method © © © © ;- © © © > -©_:'©; •© © ©;,■ , © Q 99 h ' Mark-up „ Mark-down j. and Mark-on - © ©} ©v} 100 1Shy; ; are Ignored in the Computation of the Cost Ratio © © 103 The Retail‘ Method, is - Based on Averages o. O 107 Department al Rat es -©; © © © ©} ©. © © ' © .«.. o O 107 ;; Special Sale Merchandise © « © © © © .© ® © 109 ; Period Covered hy Computation © © . © © :; o © 110 ;' : Freight, Discounts, and Returns © © 6 6 112 Extended Illustration .© © © © © © © © e 113 : Combination of Retail and .least-in. First- ' ‘ • : • ■ . out Methods © ,©,-©i; » © ■ © . '©; © '© ■© }© I & - °.114 Conclusion © © ©t » >; .©: ©■ © © © ;'©- .©/ © ©-'© o 114 1,;.: ; internal; Revenue Code .1© ;© © t ©© ■:» © ©' .©' 115 111 Chapter Page YIo MIBGliliMKlOUS s . = =. > « < . , . » ■. = . 6 117 Inventories by Dealers in Securities 0.« = = 117 . Internal Revenue Code 0 «, ? 0 o = „ > , <, 118 Valuation of P a m inventories » . « 119 Internal Revenue Code » 0 i 0 = « e 121 Estimating Values of Inventories 0 « = G 124 Merchandise Turnover „ , <, . = « . » « 126 - Inventory Reserves » » o . » <= » ..... » . 128 Inventory Valuation Reserves , . = . 128 Reserve for Possible Future Decline in Inventory Values . = . ... „ . 131 Reserve for Replacement- of Inventories Involuntarily Liquidated under the -" Last-ih, First-out Elethod .. V 136 ; Change in Basis of Inventory » <= . e . 138 Internal Revenue Code . s „ . 138 Inventory Verification 139 VII. GOHCLUSIOH . = = . .. .. 142 BIBLlCQRiPHT . 0.0 - e o 0.0 g o _ o o e o © o & 145 iv ; ; ' ' . ; BJTRODUOTIOH .-v. ; lBveBt©ries tt.aire often 'been called the graveyard, of Anieficaat business because they have frequently been one of causes ::©f;:.business W been alXowed ' to grow too large with a eonsequent loss ,of liquidity and impaired current position, or they hare containedan ill assortment of poorly chosen or obsolete goods on which large losses have occurred. or price speeuiations have been under­ taken with disastrous results® In a typical balance sheet. - of; an Industrial eoncerng the inventories of various kinds • : usually make up 50 per cent or more of the current a s s e t s . and mercantile concerns frequently show over half of all ; their: assets in. the form of invent or ies0 . .vv*-- .:;v ■ ■■■ :. Inventories are now being given more, attention than at , any time in the past 8 due tp the f act that business .concerns , .want to reduce their hugeprofits as much"as 'possible from . : an; income tax standpoint,- and also want to prevent the ae=- cumulation of a large surplus as the stockholders might : : elamor- for additional dividends when -actually the: cash ; .., I® ; Wyman. P0 Piske s ^Introduction^n The Gohtrol and . Valuation of Inventories® . National Association of GosV%c« -: - countants TNeirYorks Io70 Mttle & Ives Go®8 194118 p0 \+.. ' , ' 2 not really available^ but has been tied up In inventories In a period of rising prises«, The quantity of goods on hand can be approximately the same as before the priee.rises but the easts might be several times greater* in Inventory has financial significance in that rev©** nuea may be obtained from its saleg or from the sale of the goods, or services in the production of which it is used* Usually these revenues come about in a continuous repetitive process or cycle of operation by which the goods are pur­ chased 'and sold and further goods are again acquired for future sales* In accounting for the goods in the inventory at any particular point of time 9 the main objective is the matching of the appropriate costs against revenues so that there may be a proper determination of the realized income„ Definition of Inventories The term !9inv@ntoryw . is used in this investigation to designate, the aggregate of those items of tangible personal property which are held for sale in the ordinary course of business 9 are in the process of production for such saleg or are to be currently consumed in the production of goods or •. ' ... .- ■ ■ V ':: ■ 2 services which in turn are to be available for sale * • . 1 * ■ Gommittee on Accounting Procedure s American Insti<=> tute of Accountantsg "Accounting Research.Bulletin No* 29: Inventory Pricing^" Journal of Accountancy: 84?196-197 (September 9 19471. 2 o Ibido a p* i960 3 Need for Inventories The use ©f inventories at the beginning and end of each year Is required in every ease in whleh the production, pur­ chase,^ or sale, of merchandise'is an Ineoae^prodneing factor. The purpose of inventories is to make possible the deter­ mination of the cost of goods sold for an aeeounting period. The Commissioner of the Bureau of Internal Revenue, United States Treasury Department 9 may require the use of inven­ tories in .any other oase .where in his opinion they are neees- sary in.order to clearly determine net incom®. In business where inventories are used, the accrual basis of aeeounting ■ ■ ; 1 must be used with regard to
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