Do you need this or any other assignment done for you from scratch?
We have qualified writers to help you.
We assure you a quality paper that is 100% free from plagiarism and AI.
You can choose either format of your choice ( Apa, Mla, Havard, Chicago, or any other)
NB: We do not resell your papers. Upon ordering, we do an original paper exclusively for you.
NB: All your data is kept safe from the public.
Determining Costs for Including in Inventory
There is only one criterion for determining the costs, which should be included in the inventory – their relation to preparing this inventory for sale. Nevertheless, there are numerous items of expenditures, which can be related to this measure. They are added at every stage of obtaining inventory from purchase to sale and are both direct and indirect. First of all, the price of the inventory itself should be included because it is the foundation of the process of price formation. Moreover, all transportation costs should be calculated, as they are direct expenditures for delivering inventory. Also, storage costs are as well as significant articles of expense. They are referred to as holding costs and can be both fixed in case of owning a warehouse for storing inventory or not in case of renting it. Setup costs should as well be kept in mind if the Steel Company offers services of setting up bought inventory. Finally, some additional costs, which are connected to the process, should not be ignored. This group of expenditure items might include shortage, data acquisition, computation, insurance, and inventory system control costs as well as property taxes and the costs for training staff in case of necessity (Ponisciakova, Gogolova, & Ivankova, 2015). It is essential to note that the initial price of inventories, transportation, and holding costs are direct expenditures, while other articles of spending are indirect because they cannot be easily associated with the inventories even though they still have a significant impact on its value.
Amounts of Inventory to Be Reported on the Balance Sheet
In the case of the Steel Company, inventory should be reported at market value. This option is easy to explain by using the lower of cost or market rule. According to this approach, the market cost is the same as the replacement cost until it does not exceed the net realizable cost. When speaking of the company under consideration, its original cost is below net realizable value (ceiling cost) and its replacement cost is lower than the original cost (Christensen & Nikolaev, 2013). Until these conditions are preserved, the Steel Company should report all sold inventory at the market.
Appropriateness of the Lower of Cost or Market Rule
Lower of cost or market rule is commonly used for reporting inventory to guarantee that it is neither undervalued nor overvalued. There are several reasons for appraising the appropriateness of this accounting tool in the case of the Steel Company. First and foremost, the lower of cost or market rule is commonly chosen for drawing accurate conclusions regarding the financial activities of the company due to the correlation between net realizable value and replacement cost, i.e. a market value. Moreover, it applies to different volumes of inventory. It means that the company has an option for reporting separate units of inventory, groups of units based on major categories of inventory, or a total amount of sold and remaining inventory. In this case, the approach is beneficial for determining both potential future incomes and losses due to assessing fluctuations in market value. More than that, it is useful for estimating successfulness of the firm’s operations because calculations are conducted for the whole reporting period. That said, it helps estimate periodical income and turns it into the foundation for altering the company’s business model in case of necessity (Zhang, 2013).
References
Christensen, H. B., & Nikolaev, V. V. (2013). Does fair value accounting for non-financial assets pass the market test? Review of Accounting Studies, 18(3), 734-775.
Ponisciakova, O., Gogolova, M., & Ivankova, K. (2015). The use of accounting information system for the management of business costs. Procedia Economics and Finance, 26(1), 418-422.
Zhang, X. J. (2013). Book-to-market ratio and skewness of stock returns. The Accounting Review, 88(6), 2213-2240.
Do you need this or any other assignment done for you from scratch?
We have qualified writers to help you.
We assure you a quality paper that is 100% free from plagiarism and AI.
You can choose either format of your choice ( Apa, Mla, Havard, Chicago, or any other)
NB: We do not resell your papers. Upon ordering, we do an original paper exclusively for you.
NB: All your data is kept safe from the public.