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One of the key factors to keep in mind when preparing a generally accepted accounting principles (GAAP) inventory is that inventory must be properly valued. This is a particularly important issue with GAAP accounting, as it can affect the accuracy of company valuation. Some of the things considered when reporting on inventory with these standards are the true value of the inventory, the timing of when it is reported, and how it is tracked. With GAAP inventory accounting, items are accounted for when they are purchased.
When making a GAAP inventory, the standards require that an accurate value be placed on the stock. A particular concern is that inventory will be over-valued, thus inaccurately inflating the value of the company. Some things to consider when determining inventory value include deterioration and depreciation. It should also be determined whether the inventory still has value in the market. In order to continue to accurately gauge the value of inventory, these elements are usually reviewed on a regular basis.
According to GAAP inventory standards, items must be entered at or below market value. When inventory is at market value, it is the price determined at the time of purchase. If items are valued below that price, it is typically because they are older, somehow damaged, or have fallen out of demand. The overall rule is that the lower figure of the two should always be reported.
Another tactic used to prevent overvaluation is to determine a ceiling for inventory, which is a cap on the value that can be reported. It is also common to have a floor, or minimum possible, value established for inventory. This is so the company will not undervalue inventory in order to artificially make profits appear higher.
If inventory costs more than market value, then that must be accounted for as well. The usual method is to enter the difference as a loss. This situation typically happens when the demand for a product plummets suddenly. It is usually only a short-term condition which the company must reverse if it is to stay viable.
The accuracy of GAAP inventory often primarily depends upon the accountant. As there is a great deal of speculation involved in determining the value of items, opinion plays a key role in valuation. For that reason, the integrity, knowledge and skill of the accountant tend to have a direct effect on how well inventory accounting is managed.
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