Inventory, Fixed Assets, and Intangible Assets Accounting: A Comprehensive Guide
Chapter 7: Inventory
Periodic vs. Perpetual Inventory Systems
Periodic Inventory System: Inventory purchases are debited to a Purchases account.
Perpetual Inventory System: Inventory account is debited for inventory and credited when goods are sold, transferring the cost to Cost of Goods Sold.
Inventory Costing Methods
FIFO (First-In, First-Out): Assumes oldest costs are sold first, leaving newer costs in ending inventory.
LIFO (Last-In, First-Out): Assumes newest costs are sold first, leaving older costs in ending inventory. In periods of rising prices, LIFO tends to result in the highest reported Cost of Goods Sold.
Inventory Valuation and Ownership
Goods in Transit (FOB Shipping Point): Included in the buyer’s inventory.
Goods in Transit (FOB Destination): Included in the seller’s inventory.
Goods on Consignment: Included in the consignor’s inventory.
Inventory vs. Period Costs
Inventory Costs: Costs directly related to acquiring or producing goods for sale (e.g., purchase price, manufacturing costs).
Period Costs: Costs not directly tied to production, expensed in the period incurred (e.g., selling costs).
Chapter 8: Lower of Cost or Market (LCM)
LCM is a conservative approach to inventory valuation, ensuring inventory is not reported at more than its net realizable value.
Ceiling and Floor in LCM
Ceiling: Net Realizable Value (NRV) – prevents overstatement of inventory value.
Floor: NRV – Normal Profit Margin – ensures inventory is not valued below its expected selling price less a reasonable profit.
Market in LCM for Raw Materials
“Market” refers to the lowest of: Replacement Cost, NRV, or NRV – Normal Profit Margin.
Chapter 9: Property, Plant, and Equipment (PP&E)
Historical Cost Principle
PP&E is recorded at its acquisition cost, including all necessary expenditures to get the asset ready for its intended use.
Components of PP&E Costs
Land: Purchase price, closing costs, etc.
Land Improvements: Driveways, parking lots, landscaping, etc.
Buildings: Construction costs, including materials, labor, and overhead.
Equipment: Purchase price, transportation, installation, etc.
Interest Capitalization
Interest costs incurred during construction of qualifying assets can be capitalized as part of the asset’s cost.
Capitalization period ends when the asset is substantially complete and ready for use.
Chapter 10: Depreciation
Depreciation allocates the cost of a PP&E asset over its useful life.
Depreciation Methods
Straight-Line: Equal depreciation expense each period.
Units-of-Production: Depreciation based on actual usage.
Double-Declining Balance: Accelerated depreciation method.
Sum-of-the-Years’-Digits: Another accelerated method.
Depreciable Base
The total amount to be depreciated (cost – salvage value).
Changes in Estimates
Changes in estimates (e.g., useful life) are handled prospectively, affecting current and future periods.
Chapter 11: Intangible Assets
Intangible assets lack physical substance but provide future economic benefits.
Types of Intangible Assets
Contract-Related: Franchises, licenses, etc.
Customer-Related: Trademarks, customer lists, etc.
Technology-Related: Patents, copyrights, etc.
Amortization of Intangible Assets
Limited-life intangibles are amortized over their useful lives, typically using the straight-line method.
Indefinite-life intangibles are not amortized but tested for impairment at least annually.
Internally Created Intangibles
Costs incurred internally to create intangibles are generally expensed as incurred, with some exceptions (e.g., software development costs).