Inventory is an important asset either for manufacture, service, or trading company. In indonesia, presentation, recognizion, valuation, and disclosure of inventory are regulated in PSAK 14 (revisioin of 2008). Based on PSAK 14 (revision of 2008), inventory is defined as a current asset available for sale (1) in a production process to make a sale (2) in a form of raw material and supplies used in a production process and/or making service. We’re going to discuss inventory on views of PSAK 14.
An asset would be recorded as an inventory according to a company’s nature business. Example, a car would be recorded as an inventory, not as a fixed asset, if the company which has the car would sale the car in it’s normal busines activity or in other words the nature business of the company is selling the car. It is same as companies selling a property (land and/or building), they would treat the property as an inventory, not as a fixed asset, as their nature business is selling the property.
The classification of inventory will depend on business type, whether it is a manufactured or a trading. The classification of inventory in a manufacture company is different from a trading company since the business cycle both of them is also different. In manufacure company, the inventory will be classified variously more than the trading company. The inventory in a manufacture company consists of raw material inventory, goods in process inventory, and finished good inventory. While the inventory in a trading company covers only one kind of inventory, it is merchandise inventory.
Meanwhile, the goods in the inventory will be clasified as (1) goods in a company and belong to the company (2) goods in a company but they don’t belong to the company (3) goods belong to a company but they are placed in another company. In the second and the third classification, it is often hard for a company to determine the ownership right on goods. It would happened to both goods in transit and consignment goods.
We always hear a term of Free On Board (FOB) concerning goods in transit. Basicly, the ownership of goods would be transfered from one party to another if the transction subsantively transfered risks and benefits of possesing the goods to that another party. In good in transit, determining the ownership of the goods and recognize them as inventory would based on who pay the shipping expense called Free On Board (FOB). There are two kinds of FOB, those are FOB Destination and FOB Shipping Point. FOB Destination means that the company who sells the goods will bear the expense of shipping and the ownership of the goods will remain to the selling company untill the goods arrived to the company who buys the goods. FOB Shipping Point could mean the inverse of FOB Destination so that the company who bears the expense of shipping is the purchasing company and the goods will be recognized as inventory by the purchasing company right away when the goods are shipped. In a practice, the term of Free On Board uses a specific location where the ownership of goods will be transfered. Example, Alharsi Corp in USA will ship goods to Acconer Corpindo in Jakarta with FOB in Jakarta, it means that they use FOB Destination and the shipping expense will be covered by Alharsi Corp in USA.
On consignment goods, a company leave the goods in another company and that another company will sell them to consumers. The company who leaves the goods is called consignor and the company where the goods are placed and sold is called consginee. The profit of the goods sold will be share in a certain percentage between the consignor and consignee as stated on a consigment contract. The consignor recognizes the goods as their inventory and has to disclose them on the accompanying notes.
Principally when a company sells it’s product, the risks and benefits of having the product should be transferred from the seller to a buyer. In a certain condition, when a sale is made along with a special aggreement such as sale with a promise to buy back, sale with a high return of product, and sale with installment, we need to evaluate whether the risks and benefits has been transferred to the buyer or it hasn’t. The first aggrement, sale with a promise to buy back, the company who sells a product aggrees and promises to buy the product back from the buyer. In that case, the seller can’t recognize the aggreement as a sale and still recognizes the ownership of the product, doesn’t reduce it from it’s inventory. For the sale with a high return, a company has two alternatives, first is recognizing and recording the aggreement as a sale and make an allowance for estimated sales return, and the second is not recording the aggreement as a sale untill the rate of the return can be estimated very well. In a condition when the rate of return can’t be estimated, the company can not recognize the sale. For the sale with installment, the seller recognize the sale and put out the product from inventory as long as the seller can estimate very well a possibility of uncollectable sale.
In recording an inventory, we have two systems: perpetual and periodic. On perpetual system, we measure and record the cost of goods sold right away when the goods are sold. On periodic system, we measure and record the cost of goods sold in each last periode and not when the goods are sold. The perpetual system is often better than the periodic since it records the cost of goods sold perpetually so that it provides an up-to-date information of inventory.
We have three ways in measuring the cost of inventory based on PSAK 14, those are special identification methode, first in firs out methode, and weighted average cost methode. But then, the inventory is measured from which is the lower between historical cost and net reliazable value. Special identification, first in firs out, and weighted average are historical cost. Net reliazable value is an estimated price of inventory in a usual and normal company’s activity less cost to finish and cost to sell.
Well, that’s all about the overview of inventory i can write on this page. Thank you for your interest, hope this would help you 🙂
Notes: please verify if i had made a mistake, i’m the author but it doesn’t mean i’m right all the time.