23 Nov Other Methods of Inventory Valuation
If average cost is not an appropriate method for the business entity, extreme care should be used when adjusting the value. The best method of adjusting the value, to retain the integrity of the detail reports to the general ledger, is to adjust the value (not the quantity) of the individual inventory items. The account used in this case would typically be a cost of goods sold type account (since the amounts charged to cost of goods sold as the items were invoiced or used on a cash sale would have been incorrect). When a cost of goods sold type account is used, a warning will appear that the type of account should be an income or expense type. This error message can be acknowledged and then ignored.
If the value adjustment is required due to direct and indirect costs to be included in the inventory value, consider making the adjustment to one general ledger account (an inventory adjustment clearing expense account) then subsequently create a journal entry to reclassify the change to the correct general ledger accounts.
If the length of the item list does not make adjusting each individual item feasible, create an inventory adjustment item (inventory part type) to be used for the dollar amount of the change. Then adjust the value of the new item using the procedure detailed above. This will keep the detail reports in balance with the general ledger totals.
Below are suggestions for specific issues for consideration in relation to inventory:
· All direct and indirect costs incurred to prepare the inventory for sale (how does it effect the quantity, how does it effect the average cost)
· Work in Process, Raw Materials, Finished Goods
· Documentation of inventory procedures
· Testing Inventory Cut Off