How do you classify the cost of inventory?
submitted by Brighton Early

spaced

There are multiple methods: LIFO, FIFO, Average, Standard, Last, or Serialized. Each has pros and cons.

Arnold

Under Sales, as Cost of Goods Sold.

Debit Inventory
Credit Accounts Payable.

William

You'd want to classify that as a current asset on the balance sheet. It includes all costs necessary to bring the inventory from materials to a ready to sell product.

This would usually encompass the purchase price, import duties (like tarrifs), non-refundable taxes, transportation costs, handling, and storage. Inventory is more than just the cost of the goods you bought. Under generally accepted accounting principles (GAAP), these costs are capitalized until the inventory is sold, at which point they are recognized as cost of goods sold.

J Sherman

The cost of inventory is considered an asset because it represents products that a company owns and plans to sell. If you can sell it for money, it's an asset.

The cost of inventory also covers other costs associated with buying the inventory, like shipping, storage, and taxes.

marvin

You'd classify inventory as a current asset. Doing it this way makes it clear to stakeholders what the company's short-term liquidity is.

With FIFO and LIFO, each impacts changes how inventory costs are reported. FIFO (First-In, First-Out) tends to match current sales with older costs, which can be good during inflationary periods, because it shows higher ending inventory + gross profit. LIFO (Last-In, First-Out) has tax advantages. It matches recent, higher costs against current revenues, but it might understate inventory value.