Inventory is a term used in accounting to refer to the raw materials, unfinished goods, and finished goods that a business holds for sale or use in the production of other goods. FRS 102, the financial reporting standard that applies in the United Kingdom, includes guidance on the accounting treatment of inventory.
According to FRS 102, inventory is measured at the lower of cost and net realizable value. Cost is defined as the expenditure incurred in bringing the inventory to its present location and condition, and includes such items as direct materials, direct labor, and overhead. Net realizable value is the estimated selling price of the inventory, less the estimated costs of completion and the estimated costs necessary to make the sale.
Inventory is recorded in the balance sheet at the lower of cost and net realizable value. If inventory is valued at cost, it is typically determined using the weighted average cost method, which takes into account the quantities and costs of all units of inventory on hand. If inventory is valued at net realizable value, any excess of cost over net realizable value is recognized as a loss in the income statement.
FRS 102 also includes guidance on the disclosure of inventory in the financial statements. Entities are required to disclose the carrying amount of inventory, as well as the methods and assumptions used in valuing inventory. They are also required to disclose any write-downs of inventory, and any changes in the methods or assumptions used to value inventory.
Overall, the guidance on inventory in FRS 102 provides a consistent and transparent framework for the measurement and disclosure of inventory in the financial statements. It helps to ensure that the financial statements of entities accurately reflect the value of the inventory they hold.