Adjustments for inventory

NotesQuizCBEMock

Inventories

Inventories are assets:

  • held for sale in the ordinary course of business;

  • in the process of production for such sale; or

  • in the form of materials or supplies to be consumed in the production process or in the rendering of services.

Inventory can be a significant figure for some businesses, e.g. manufacturing companies.

It affects the financial statement in two ways:

  1. Statement of financial position: it is included as a current asset

  2. Statement of profit or loss: 

    opening and closing inventory have a direct impact on cost of sales and therefore profits. 

    (The cost of goods sold is calculated as: Opening inventory + Purchases – Closing inventory).

All businesses must therefore ensure that their financial statements account for inventory accurately in terms of:

  1. the accounting adjustment

  2. its valuation

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