Accounting Topic Inventory Accounting
Firm inventory includes the raw materials, work in progress and thefinished goods that are held by the company to be applied for theproduction process and for sales to the customers. In accounting,inventory is considered as part of firm assets. For instance, FordCompany Accountant is required to apply a consistent and valid methodthat assigns the costs of the inventory with an aim of recording itas part of the assets. Valuing the inventory of a company ischallenging issues since the accounting methods and techniques thatare applied have to create a valuation with a direct way of bearingthe amount of expense that are charged in the cost of goods sold(Beatty and Joseph 127). According to FASB, “ASC 330 providesguidance on the accounting and reporting of inventory in thefinancial statements.”
Ford motor has been in operation for a longtime. The global recessionand the credit crunch have devastated the United State auto industry.Few years back, the automakers (among them Ford), moved almost 14 to15 million cars per year. Currently the number has lowered to around9.5 million. This has resulted to major job loss, massiverationalization of value chain and government intervention.
The Main Ford Valuation Drivers
Inventory: for the company it has been cheap to carry hundreds ofcars in a lot. The cars have been sitting as inventory of thecompany taking around 30 to 45 days during the recession and thecompany is longing for 90 days or more.
Multiple revenue streams: this is the margin created in the new carsales of the company. this is the main reason why dealers demand formore and better services to sell per clients,- financing and repairwork.
Accounting for Ford Inventory
According to FASB, accounting for the inventory depends on the typeand the size of business. The concepts that are applied in inventoryare not hard but require an accountant to have familiarity. Whenaccounting for the cost of goods sold, the following formula isapplied:
Beginning inventory $XXX
Add: Purchases within the month XXX
Less: closing inventory XXX
Cost of goods sold XXX
“Current Generally Accepted Accounting Principles (GAAP) requiresreporting organizations to measure inventory at the lower of cost ormarket. Market could be net realizable value, replacement cost, ornet realizable value less a normal profit margin when measuringinventory.” When accounting for the inventory, the first step to beconsidered is conceptualizing on the “inventory process.” Thiswill account for thinking of what is going on and what is happening.For instance, the main purpose of Ford Motors Company ismanufacturing and selling cars. These products may be acquired byproduction or through purchases as part of finished goods. Hence,during a defined accounting period for the Ford Motors, there is theneed to take a portion of the inventory sold. In most cases, the costof the product may not exceed the sales price to ensure that profitwas realized. With the amount that was sourced as part of theprofits, there are more chances of purchasing inventory to be sold,cover the expenses and pay the business (Beatty and Joseph 123).
The main challenge that an accountant experiences during accountingfor the inventory is determining the Cost of Goods Sold (COGS).Generally, various methods are used in calculating for the cost. Acompany may opt to apply the periodic or the perpetual system ofaccounting to record the inventory (Beatty and Joseph 122). Inperiodic inventory accounting, this technique involves theconsideration of the increase (debit) on purchase after there areacquisitions. In general, ledger, purchases are allocated as cost ofsale section in the profit and loss statement of a firm. During theclose of the accounting period, there is a physical count taking theremaining inventory to make a determination of the amount ofinventory unsold (Beatty and Joseph 129).
On the other hand, the perpetual inventory method taking adifferentiated way. There is acquisition of new inventory and theyare charged on the debit side of the inventory account. After makingthe sales, there is a corresponding entry that is made to deduct(credit) the items being sold from the inventory and debiting cost ofgoods sold (purchases). The result that will be sourced will indicatethat the inventory account will have to maintain a current balanceand the COSG will have a reflection of all the cost of goods sold bythe end of accounting period (Rudi, Harry and Taylor 1362).
Benefit that is associated with this method is that one has thecapacity of running the interim financial statement without takingany physical inventory count. Additionally, there are increasedchances of noting any shortages and any discrepancies and take thebest corrective action (Rudi, Harry and Taylor 1365).
The best way to remember the difference between the two methods isthat, under the periodic system, the method account for the inventoryat hand and the perpetual system account for the inventory thatshould be on hand (Rudi, Harry and Taylor 1365).
After making a selection of the inventory accounting system, theother step that follows is the selection of the method that willprice the inventory. Some of the methods that are used are First inFirst out (FIFO), Last in Last Out, (LIFO), Weighted Average, RetailMethod and the Specific Identification.
Inventory Pricing Methods used by Ford Motor
First In First Out
FIFO method creates an implication that items that were purchased bythe company at first sold be sold first. The cost of goods that aresold is calculated by the use of the oldest prices. The endinginventory is calculated using the most recent inventory prices. Whenapplying this method to calculate the cost of inventory, there is animplication of a fir statement if the inventory in the firm statementof financial position (Rudi, Harry and Taylor 1360). The fairimplication is created since the ending inventory was the one thatwas purchased most recently. Additionally, when the inventory will beable to turn regularly, the price to be used for the cost of goodssold will have a consideration of the current result of fairpresentation of the cost of sale amount (Rudi, Harry and Taylor1360).
Last In First Out
This technique creates an implication that items that were recentlypurchased by the company to be sold at first. When calculating forthe cost of goods sold, there is the use of the recent prices areasthe ending inventory is calculated using the oldest prices (Rudi,Harry and Taylor 1362). This is the method that emphasis upon theaccounting matching concept and accounting principle that tries tomatch the cost with the current sale in the firm profit and lossstatement. However, the inventory prices that may be used in thebalance sheet may tend to be outdates and quite unrealistic. This isthe situation since the current prices may increase or decrease hencecausing a true value to the ending inventory and be over or underestimated (Beatty and Joseph 119).
This method incorporates the process of assigning the same unitprices for all the items of the inventory and to all items of thecost of goods sold. Generally, the price that is assigned act as anaverage price for the entire period that is calculated using thetotal cost during the beginning of the inventory period adding thecost of the unit that were purchased within the accounting period andderived by the total of all units that were involved (Rudi, Harry andTaylor 1361).
This method is applied when identifying the cost associated with eachinventory item by matching all items with cost of acquisition plusother a locatable costs such as transportation cost and labor cost.This method tends to be quite accurate when accounting for theinventory. However, this method requires certain sophisticatedsoftware program to account for the inventory with large quantitiesof certain small items (Beatty and Joseph 120).
This crucial method is applied when estimating for the ending firminventory and the Cost of Goods Sold. The value of the endinginventory is determined by use of the average markup percentage withthe total retailing prices of the goods held at hand. The basicformula that is applied in determining the cost of good to be soldwithin an accounting period is:
Beginning inventory + purchases-ending inventory = Cost of Goods sold
According to FASB requirements, Inventory is supposed to be recordedat a lower cost or the net realizable value. Some of the costincludes purchase cost plus any other direct costs that has been usedin bringing inventories at their present location and conditions. Thedirect costs are part of the production of inventory such as directlabor and production expenses (conversion cost) and other costrelated to transportation, taxes and duties and handling expenses.The cost does not include general and administrative cost that doesnot attribute cost to the inventory. As well, the selling and thedistribution expenses, storage costs and the excessive expenditurethat was resulting from abnormal waste that is not part of the costof inventory (Rudi, Harry and Taylor 1360).
Ford Motor Company net realizable values is estimated using theselling price of the business less the estimate cost of completionand estimated costs crucial in making the sales. Any time sales andpurchases occur are recorded in the respective ledger accounts.Inventory is accounted in the form separately from purchases to saleswith use of single adjustment at every accounting period end. Theinventory accounting method requires finding the value and salesevery time sales have taken place. Accounting for sales and purchasesis maintained separately from the accounting of the inventory,measurement of inventory requirements should be done once in a month.
Beatty, Anne, and Joseph Weber. "The effects of debt contractingon voluntary accounting method changes." The AccountingReview 78.1 (2003): 119-142.
Rudi, Nils, Harry Groenevelt, and Taylor R. Randall. "End-of-periodvs. continuous accounting of inventory-related costs."Operations research 57.6 (2009): 1360-1366.