Valuation of Inventory

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Valuation Of Inventory

Can the valuation of Inventory be done on the basis of receipt of goods and valued based on the PO price or should we wait for the Invoice to come and then do the valuation.

What happens when the Invoice comes at a later month and the goods have been received. I am assuming that the transfer of ownership of the goods have happened once the goods have been received in the warehouse.

 

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Like with many similar situations, you can enter an estimated value based on the PO price and then if the invoice turns out to be different, you would then make a corrective adjustment. Title passage to the goods is usually covered in either the purchase agreement or in the invoice (usually the fine print on the back), and could legally have passed even before reaching your warehouse.

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Anon;

A helpful way of looking at this is when the liability for the inventory shifts to you. If it is on your dock and is your problem, it should be an asset, and the open PO should be a liability whether you've gotten the invoice or not.

It is not always the case that liability transfers upon receipt...just consider Walmart, which has plenty of stuff on it's shelves that is absolutely not their inventory. It becomes their inventory when the sale of the product occurs to the end user.

So, it depends on the arrangement you have with your supplier.

KP

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Thanks, the arrangement for my retail company is simple, goods bought , invoice received. I suggested that the valuation be done on the basis of PO rate as the invoice may come later. I was told that one needs to await the invoice to do the valuation to which I have not agreed. The first entry should be Dr Inventory (@po value) Credit Provision for Goods supplied. When the invoice comes in, Dr prov and Cr Liability/Bank. If there is a deduction, then the adjustment at the time of Invoice procession should either Dr /Cr the Inventory to the extent of the deduction directly attributable to the goods received, if the deduction is related to anything other issue to the supplier, then a Dr note is raised directly to the supplier by credit to the relevant account.
Thanks and Regards

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My two bits on inventory valuation will be similar to where you ended up.

First - ownership for almost all inventory transactions is based on the order/receipt process and has nothing to do with the invoice. FOB shipping point or dock receipt, inco terms or not, basically taking the goods in hand means you own the material.

Second - inventory valuation methods need to match the reality of inventory velocity. Goods come in and move - for most of us the faster the better. Slowing reality down to try and match specific invoices to specific receipts rarely adds value to your financials.

Third – there is value in isolating the difference between purchase order price and invoice price as an evaluation of your procurement system. Most people record this to purchase price variance – which is either a period expense, or if material is capitalized and moved to the P&L on the inventory turns cycle. PPV is a COGS expense – so it does return to inventory value at the time of sale.

Philosophically – I believe your financials should do more than record history. Ideally they will tell a story that helps you guide the business. In this particular case the story is around what drives gross margin and how it could be improved. Is it your selling price, or are there flaws in your procurement process that can be improved?

Bob Scarborough
www.tensoft.com

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Proper accounting for inventory occurs prior to receiving your invoice. With respect to the ownership question, there are mainly three permutations -

1) Freight on Board (FOB) Shipping Point - title passes at time of shipping, i.e. inventory value should be recorded and show up in your balance sheet when it leaves the distributor;
2) Freight on Board Destination - title passes upon receipt i.e. inventory value should be recorded and show up in your balance sheet when it arrives at your location; and,
3) Consigned Goods - title never passes.

In theory, you order to fulfill orders. Hopefully you have sold the merchandise prior to receiving the invoice. To abide by the Matching Principal, you should record the expense and revenue, regardless of when you receive the distributor's invoice.

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