CAT / FIA FFA Syllabus D. Recording Transactions And Events - Adjustments for inventory - Notes ^{1 / 10}

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