You have inventory on your balance sheet and it’s measured in its lower of cost or net realisable value. It increases as you buy items and once you write something down, it decreases in value. That’s the easy part.

However, once you start expensing it onto income statement (the third way inventory decreases), that’s where the fun starts. Well, fun or tricky part to say the least. Why is it so? Let me first explain. Say you’ve bought the same item with different prices, say 10 and 12 – on your inventory listing you have 1 item with the price of 10 and the other with 12, totalling to 2 items worth for 22.  What happens if you sell one of them?  Continue reading →

The thing with inventory write-offs is that it’s tempting to use straightforward math for determining the write-off amount.

Once something has been in stock for a year and it hasn’t been sold, doesn’t it feel like that it should automatically be written off like 50% or even fully? For some it seems and others it doesn’t. There’s nothing wrong with being more conservative, but little too much isn’t also all that good.  Continue reading →

You’re producing items that you’re selling. During this process you encounter various types of expenses – material itself, your own time and / or people that work for you and produce those goods or components for those goods, depreciation of machinery and equipment, expenses relating to utilities etc.

It’s not just those expenses, but also marketing and general administrative expenses that a business encounters.  Continue reading →

Inventories are sensitive in nature – they’re bought in stock that you hope to sell or use some day. This “some” day is your estimate of the possible need of the market and as we know with estimates, they may be wrong.

In this sense inventories are sensitive because they’re your stock, you’ve paid for them and you hope to sell them. However, on your balance sheet they should be recognized in lowest of either the cost of the item or the value you hope to sell them one day (it’s called “net realisable value”). This is where sensitivity comes in.  Continue reading →

When we talk about inventory and its value you may hear or read the word “active market” being used. What is an active market however?

An active market when it comes to measuring the value of inventory essentially is the market you are expected to sell your goods. It’s not the market you plan to go with your products, it’s the market you are already in, you make regular sales and you can estimate a selling price over there.  Continue reading →