Understanding Inventory Assertions: Where Balance Sheet Meets Transactions

Inventory is unique because it has characteristics of both transactions/events and account balances. Here's why:

Transaction/Event Aspects:

• Inventory involves transactions like purchases and sales throughout the period

• Movement of inventory (transfers, returns) represents events

• Cost flows (FIFO, LIFO, weighted average) are tied to transactions

Account Balance Aspects:

• Inventory is reported as an asset balance on the balance sheet

• Physical inventory exists at a point in time

• Valuation is assessed at the balance sheet date

Because of this dual nature, inventory-related assertions cover both categories:

Transaction/Event Assertions for Inventory:

1. Occurrence - All recorded inventory transactions took place

2. Completeness - All inventory transactions are recorded

3. Accuracy - Transactions are recorded at correct amounts

4. Cutoff - Transactions are recorded in the proper period

Balance Sheet Assertions for Inventory:

1. Existence - The Recorded inventory physically exists

2. Rights and Obligations - The Entity has rights to the inventory

3. Completeness - All existing inventory is recorded

4. Valuation - Inventory is recorded at proper amounts (including consideration of net realisable value, obsolescence)

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