This document provides an overview of inventories for financial accounting purposes. It discusses the components of ending inventory, cost components included in inventory valuation, acceptable inventory cost measurement methods (specific identification, FIFO, LIFO, weighted average), inventory systems (perpetual vs. periodic), costing methods, valuation at lower of cost or net realizable value, potential errors in inventory, and estimation methods (gross profit, retail price). The document aims to comprehensively cover the accounting concepts and standards related to inventory valuation and financial reporting.

1. Inventories
FINANCIAL ACCOUNTING
Student name: Ehab Shehadeh
To Dr. Naser Abdelkarim

2. Contents
 Introduction
 Components of Ending Inventory
 Cost Components
 Inventory cost measurement methods (cost formulas)
 Stock Inventory Systems
 Inventory costing methods
 Valuation of ending goods at cost or net realizable value, whichever is
lower
 Errors in inventory
 Inventory Estimation Methods

3. 1. Introduction:
Inventory is one of the most important elements of current assets due to its high relative importance,
especially in establishments commercial and industrial. International Accounting Standard No. 2 entitled
“Inventory” defines: as the sum of goods that are purchased by the enterprise with a view to selling them in
the ordinary course of the enterprise and the goods that are in the process of production or manufacture for
the purpose of selling and goods in the form of materials or supplies consumed in the process of production
or the provision of services and in this sense inventory also includes the fuel stock component (gas, petrol,
etc.) in industrial companies. Usually inventory in commercial establishments consists of only one item, which
is finished goods.
Industrial facilities consist of the following three elements:
A- Raw materials used in the manufacturing process.
B- Goods in operation, i.e. whose production has not been completed until the end of the fiscal year.
C- Finished Goods.
Since inventory is kept for trading, it is considered one of the components of current assets, and therefore it is
one of the elements of working capital

4. 2- Components of Ending Inventory
When calculating the quantity of end-of-period inventory, the basis for determining the components of end-of-term
merchandise is the ownership of this stock components regardless of where they are located, indicating that end-of-
term merchandise may include owned merchandise for the facility, but it is not found in its warehouses, such as the
goods that are with sales agents to sell for the benefit of the facility, which is it is called a commodity, at the same
time, there may be goods at the facility that are not included in the merchandise
The end of the period due to the fact that the facility does not own these goods, such as the goods sold to a
customer, but he has not received them yet that is, you are still in the facility's warehouses until the end of the
financial period. Based on the foregoing, the ending stock.
It includes the following:
1. Goods owned by the establishment and in its warehouses, factories, and showrooms.
2. The goods owned by the facility but in the possession of the agents (for sale fee) and here the facility is called the
principal as for the merchandise, it is called trust merchandise. (Consignor) for merchandise
3. The goods in the customs bonded warehouses, which the facility has retrieved but not withdrawn from
Customs until the inventory date or the end of the financial period.
4-Goods purchased in Transit on condition to receipt from the seller company's stores, FOB shipping (Free on
Board shipping)
5- Goods sold in Transit on condition to delivery to the purchasing company's stores, FOB destination or C.I.F(Cost,
Insurance and Freight)

5. Also, there are some inventory items that are not included in the end-of-term
merchandise and are excluded and consist of follows:
Goods sold to others that are still in stock until the end of the financial period.
Goods that belong to others but are in the possession of the establishment for sale.
That is, the facility is an agent
(The Consignee) for other facilities and is called the agent for the goods.

6. 3- Cost Components
3-1 Components and items included in the inventory cost.
Under International Accounting Standard No. 2, the cost of inventory must generally
include all costs expenditures until the inventory is ready and ready for sale, and
accordingly, the items included in the inventory cost calculation includes the
following:
A- Purchase and delivery costs of inventory to the facility: These include:
1. The purchase price minus the purchase discount and purchase returns.
2. Customs duties and taxes are not refundable.
3. Transportation, loading, unloading, clearance, and any other expenses directly
related to the purchase process.
B: The costs of converting raw materials into finished or semi-finished goods
This type of cost appears in industrial facilities that convert raw materials into
finished or semi-finished goods for sale. This item includes the following:
1. Direct and indirect fixed and variable industrial costs. Where variable direct
costs include direct materials and direct labor.
2. When there are by-products of low relative importance, the recoverable
amount of these is estimated
Products and this value is subtracted from the cost of the main products.
3. Other costs included in the inventory cost include other indirect costs such
as costs for designing a product based on the customer's request.

7. 3.2 Costs that are not included in the cost of inventory
1. Abnormal damage and normal damage is considered part of the inventory cost.
2. Storage costs unless production requires a special storage process during
production through several production stages.
3. Administrative expenses not related to production.
4. Selling and marketing costs.
5. Foreign currency differences resulting from a change in the exchange rate related
to the purchase of goods or raw materials
6. Borrowing or financing costs. When inventory is purchased on deferred payment
terms so that the repayment period is longer than the normal repayment period, and
so that the price includes an increase over the normal purchase price, the difference
between the purchase price under the normal terms of sale and the amount paid is an
interest expense charged on the period of payment deferment.

8. 4. Inventory cost measurement methods (cost formulas)
International Accounting Standard No. 2 related to inventory provides three methods for measuring inventory
cost:
1. Actual cost expended, which is the basis for measuring inventory cost.
2. The standard cost method.
3. Retail method.
The standard requires the use of the standard costing method or the split method, provided that they give
results close to the actual cost method. The standard costing method is based on a predetermined costing that
is established based on the estimates of production requirements and the conditions of the particular
establishment. As for the retail method, it is used in retail establishments that have a large number of items,
where the percentage of the profit margin is estimated and deducted from the sales value of the inventory.

9. 5. Stock Inventory Systems:
1- Perpetual Inventory system:
It requires continuous recording of additions and exchanges from stock,
where a card or page is allocated to each item of the merchandise in which
the incoming merchandise, as well as the outgoing merchandise and the
balance, are recorded.
2- Periodic Inventory system:
As for the periodic inventory method, it does not require such a continuous
recording of changes in the inventory, that is, the imports and exports of the
stores are not proven except as purchases and sales, that is, with a financial
value only. Hence, the cost of goods sold can only be determined after
inventorying and determining the value of the end-of-term inventory.

10. Comparison between periodic inventory system and perpetual inventory system
perpetual inventory system periodic inventory system
Proof of purchases
Dr / goods in stores
Cr/ Suppliers
Dr / Purchases
Cr/suppliers
Proof of transportation costs for purchases
Dr / goods in stores
Cr/ cash
Dr / purchases transportation expenses
Cr/ cash
Proof of purchase returns
Dr/suppliers
Cr / goods in stores
Dr/suppliers
Cr / purchase returns
Proof of sales to customers and cost of sales
Dr/ accounts receivable
Cr/ sales
Dr/cost of goods sold
Cr / goods in stores
Dr/ accounts receivable
Cr/ sales
The entry is not recorded for the cost of goods sold
Proof of sales returns
Dr/ Sales Returns
Cr /accounts receivable
Dr/ Goods in store
Cr / cost of goods sold
Dr/ Sales Returns
Cr/ accounts receivable
No reduction in cost of goods sold is recognized

11. 6. Inventory costing methods :
6.1- Specific Identification
6. 2- First-in, First-out (FIFO)
6. 3- Last-in, First-out (LIFO)
6. 4- Weighted Average (WA)

12. 6.1- Specific Identification:
Under this method, the goods at the end of the period are distinguished, their source is determined, and the cost of purchasing those units is determined based on the
actual invoices. This method is suitable for establishments whose stock of goods is characterized by few units of high value, such as establishments that sell cars and
heavy machinery, as well as valuable commodities.
6. 2- First-in, First-out (FIFO):
This method assumes the flow of goods from the stores on a regular basis and according to the priority of their arrival to the stores. That is, the goods that are bought
first are sold first. Accordingly, the goods at the end of the period consist of the last transactions purchased during the financial period and are priced at the latest
prices, while the sold goods are priced at the prices of the oldest transactions purchased from the goods.
6. 3- Last-in, First-out (LIFO):
This method assumes that the last-purchased merchandise is sold first, and therefore the ending inventory will be one of the oldest purchase deals and the oldest
price. That is, under the last-in, first-out method, units of ending inventory are priced at the old transaction prices, while the sold goods are priced at the latest
transaction prices. we note here that International Accounting Standard No. (2) “Inventory” has prohibited the use of the last-in-first-out (LIFO) method as of 1-1-
2005 because this method is not in line with the concept of fair value and is not compatible with the natural physical flow of inventory
6. 4- Weighted Average (WA):
Under this method, a unified price is used to price both the end-of-term goods and the cost of goods sold, which is the average unit cost weighted by quantity,
which is calculated by dividing the cost of goods available for sale by the number of units available for sale. The use of this method is appropriate if there is
fluctuation and fluctuations in prices, the goods during the period up to and down, and this method, according to the continuous inventory system, is called the
moving average method.

13. 7. Valuation of ending goods at cost or net realizable value, whichever is lower.
In application of the concept Conservatism, IAS 2 requires that inventory be valued at cost or net realizable value,
whichever is lower.
Net realizable value = Inventory selling price - Costs to complete and sell the product.
In the event that the net realizable value is less than the cost, this means that there are expected losses due to the
decrease in the realizable value from the cost. This means acknowledging the decline in the market value of the inventory
at the budget date below the cost and not recognizing the increase in the value of the inventory.
We note here that some legislations in many countries of the world (such as the United States of America, Canada, Belgium,
Germany, Italy, Netherlands, Spain, and other countries)follow the cost or market rule, whichever is lower, and the market
price, in this case, is the purchase price of the stock on the date of preparing the financial statements :
1- Replacement Cost
2-Net Realizable Value
3-NRV-Normal Profit

14. 8. Errors in inventory:
The error in determining the cost of ending inventory will directly affect the financial statements calculating net income on the cost of
goods sold, which in turn depends on the value of the ending inventory. Also, the end-of-term merchandise is one of the main
components of the assets item in the budget, and therefore any error in the value of the end-of-period merchandise affects the number
of current assets in the budget, and it is worth mentioning that the error in the inventory of end-of-term merchandise extends its impact
on the income statement for the year Subsequent financial terms, where the goods of the end of the period for the current year are
considered the same as the goods of the beginning of the period for the following year.
The error affects the cost of goods sold the effect on the total and net profit
Increasing inventory at the end of the period Reducing Increase
Reducing the inventory at the end of the period Increase Reducing
Increase inventory at the beginning of the period Increase Reducing
Reducing inventory at the beginning of the period Reducing Increase

15. 9-Inventory Estimation Methods
9.1 The Gross Profit Method:
This method depends on the relationship between gross profit, sales, cost of sales, and ending merchandise.
This can be expressed by the following equations:
Gross Profit = Sales - Cost of Sales
That is, sales = cost of sales + gross profit
Dividing both sides of the equation by sales, we get the following:
Sales/Sales = Cost of Sales/Sales + Gross Profit/Sales
1 = Cost of sales ratio + Gross profit ratio.
Thus, the relationships in the previous equations can be used to estimate the goods at the end of the period. The sales numbers
Purchases and merchandise at the beginning of the period can be obtained from the accounting records under the periodic inventory
system. To determine the cost of sales, it is necessary to determine the cost of the end-of-the-period inventory. Therefore, according to
this method, it is necessary to estimate the percentage of gross profit for sales during the period in order to estimate the merchandise at
the end of the period.
9.2 Retail Price Method:
The retail price method includes determining the cost of beginning inventory and purchases at current selling prices, on the basis of
which the value of this inventory is subsequently determined at the prevailing selling price, and then excluding the profit from the
value of the inventory to arrive at the number of the ending inventory cost

16. Thank you