When most people go to college they think of what major would be the most interesting, and most exciting. However there are a few brave souls who want to be bored out of their mind but learn the language of business. For those few the major of accounting calls to them. Those men and women who choose accounting as their major will spend many semesters trying to figure out what the hell the professors are talking about when they go into managing and valuing inventories for companies. This one area of accounting is one of the most important parts to understand, because of the vast amounts of money companies have raped up in inventories. So sit back and get ready to be bored because we are entering the world of accounting.
Inventories are asset items held for sale in the ordinary course of business or good that will be used or consumed in the production of goods to be sold. That sounds very interesting doesn't it? Well let's think about that for a second. Companies like Wal-Mart have billions of dollars put into inventories and they need to make sure that it is properly accounted for so they do not become the next ENRON of the world. Wal-Mart gets their inventory in a ready to sell state. That means no extra cost goes into getting it ready to put on the shelf. So when a Wal-Mart accountant takes in invoices of merchandise purchased the price Wal-Mart paid was the amount that goes into their inventory account.
However for companies that are manufacturing business, like Boeing, they will have three inventory accounts called, raw materials, work in process, and finished goods. Assigning cost into the inventory account is a little different for manufacturing companies. The cost assigned to good and materials on hand but not yet placed into production is reported as raw materials inventory. Raw materials include things like plastics for sex toys or steel for skyscrapers, did I say sex in an accounting paper? These materials can be followed directly to the end product; hmm I wonder what kind of toy that plastic became? At any point in a continuous production process some units are not completely processed. The cost of the raw material on which production has been started but not completed, plus the direct labor cost applied specifically to this material and.