Inventory

Inventory is a current asset measured at the lower of cost and net realizable value (LCNRV) under both IFRS and ASPE. ACC 926 Module 8.

ADMN 201 mentions inventory as a current asset in the balance sheet and as the denominator/numerator of inventory turnover. ACC 926 supplies the cost flow assumptions and write-down rules.

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Inventory Types

Type	Description
Raw Materials	Inputs not yet processed (manufacturers)
Work-in-Process (WIP)	Partially completed goods
Finished Goods	Ready for sale
Merchandise Inventory	Retailer/wholesaler inventory (no manufacturing)

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Two Inventory Systems

graph TD
    INV[Inventory Tracking]
    INV --> P[Perpetual System]
    INV --> Pr[Periodic System]
    P --> P1[Updates after every transaction<br/>Real-time inventory balance<br/>COGS recorded with each sale]
    Pr --> Pr1[Counted at period end<br/>COGS = Beginning + Purchases − Ending<br/>No real-time balance]

(diagram saved)

	Perpetual	Periodic
Inventory balance	Updated after every purchase/sale	Updated only at period end
COGS	Recorded with each sale	Computed at period end (Beginning + Purchases − Ending)
Cost	Higher (system needed)	Lower
Used by	Most modern retailers (POS systems)	Smaller operations

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Cost Formulas (Cost Flow Assumptions)

You must pick one method per category of inventory and apply consistently.

Method	Logic	When to use
Specific Identification	Track each unit individually	Unique, expensive items (cars, art)
Weighted Average Cost	(Cost of goods available / Units available)	Indistinguishable, mixed inventory
First-In, First-Out (FIFO)	Oldest costs assigned to COGS; newest costs in ending inventory	When physical flow approximates FIFO; matches current inventory to current cost

LIFO is NOT permitted under IFRS or ASPE. US GAAP allows LIFO; Canadian standards do not.

FIFO vs. Weighted Average — Effect of Rising Prices

• FIFO: lower COGS, higher net income, higher ending inventory.
• Weighted Avg: middle-of-the-road COGS and ending inventory.

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Lower of Cost and Net Realizable Value (LCNRV)

After applying the cost formula, compare to NRV:

NRV = Estimated selling price − Estimated costs of completion − Estimated costs to sell

If NRV < cost, write inventory down to NRV. The write-down is recognized as an expense (typically increases COGS).

Two Methods to Record the Write-Down

Method	Treatment
Direct	Reduce inventory directly; loss buried in COGS
Indirect / Allowance	Use an “Allowance to Reduce Inventory to NRV” contra account; loss separately disclosed

IFRS Reversal

If NRV recovers in a later period, IFRS permits reversal up to original cost. ASPE permits this too (unlike PPE). The reversal cannot exceed the original write-down.

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Goods in Transit and Consignments

• FOB Shipping Point — Buyer owns goods in transit (include in buyer’s inventory).
• FOB Destination — Seller owns goods in transit (include in seller’s inventory until delivered).
• Consignment — Consignor (owner) keeps goods on their books; consignee never records as inventory.

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Inventory Errors

Errors in ending inventory affect two periods (because ending inventory of period 1 = beginning inventory of period 2):

Error	Effect on COGS	Effect on Net Income
Ending inventory overstated	Understated	Overstated
Ending inventory understated	Overstated	Understated

The error self-corrects after two periods (cumulative effect = 0) but each period’s reported income is wrong.

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Inventory Estimation Techniques

When physical count not feasible (interim financial statements, fire/theft loss):

Method	Calculation
Gross Profit Method	Estimated COGS = Sales × (1 − GP%); Ending Inv = COGS available − Estimated COGS
Retail Inventory Method	Cost-to-retail ratio applied to ending inventory at retail

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Inventory Ratios

Inventory Turnover = COGS / Average Inventory
Average Days in Inventory = 365 / Inventory Turnover

Higher turnover = more efficient inventory management. Days in inventory should be benchmarked against industry norms — too low can indicate stockouts.

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Cross-Course Connections

• AccountingEquation-FinancialStatements — inventory is a current asset on the balance sheet; COGS feeds into the income cascade
• FinancialRatios — inventory turnover ratio uses these mechanics
• Inventory-COGS-Ratios — connection page from ADMN 201 ratios to ACC 926 cost flows
• IFRSvsASPE — both standards prohibit LIFO; both require LCNRV

Key Points

• Two systems: perpetual (real-time) and periodic (period-end)
• Three permitted cost formulas: specific ID · weighted avg · FIFO (LIFO prohibited)
• Inventory measured at lower of cost and NRV
• NRV = selling price − completion costs − selling costs
• Inventory errors affect two periods; self-correct after two
• Inventory Turnover = COGS / Avg Inventory
• IFRS and ASPE both permit reversal of inventory write-downs (up to original cost)