115 CFA
File: Financial Analysis - Reading 25 - 1. Cost of Inventories

1. Cost of Inventories

a. distinguish between costs included in inventories and costs recognised as expenses in the period in which they are incurred;

What are the two basic issues involved with inventory accounting?
1. Determine the cost of goods available for sale: Beginning Inventory + Purchases.
2. Allocate the cost of total inventory costs (cost of goods available for sale) between two components: COGS on the income statement and the ending inventory on the balance sheet.

What is capitalized inventory costs? What do they include (and not include)?
The cost of inventories, capitalized inventory costs, includes all costs incurred in bringing the inventories to their present location and condition.
- It includes production costs, invoice price (net of discount), transportation costs, taxes, part of fixed production overhead, etc.
- It does not include all abnormal costs incurred due to waste of materials, abnormal waste incurred for labor and overhead conversion costs from the production process, any storage costs, or any administrative overhead and selling costs. These costs are typically expensed in the accounting period instead of being considered inventory costs.

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