1

Concept: I buy widgets. Some widgets I resell. Some widgets are used to make doohickeys. Of the dohickeys, some are sold, some are made into thingamabobs.

How should inventory be valued for this sort of thing?

Real life example: I buy tree seedlings and liner stock. Some are sold, some are potted up to grow on. One to two years later, some of the potted stock is sold, some of it is transplanted into larger pots.

Typically a seedling costs 50 cents. It goes into a 30 cent pot with a nickle's worth of dirt. A year of weeding and watering and fertilizing happens, and the tree is now worth $4 wholesale. For some species few are sold at this stage, for others, most are sold at this stage. Ones that aren't sold, are moved to the next larger pot.

According to International Accounting Standard 41, my inventory should be valued as "Sales value - selling costs" However my accounting package doesn't handle IAS41

It isn't reasonable to track costs of the care of an item individually.

Maintaining inventory at the price of acquisition of the components gives a distorted picture of the net worth. At any given time, the value of inventory is 4-6 times the annual cash flow.

One artifice that occurred to me to use is to have an annual internal sale at Fair Market Value of my current inventory. In this way the book value of the inventory would reflect the current real value.

Another artifice would be to sell to myself at the point of transplant. This would give a somewhat lower value.

We use cash base and not accrual base, so the internal sale doesn't affect our tax.

Are there accepted procedures for dealing with this sort of situation?

Sherwood Botsford
  • 119
  • 3
  • 1
    It's not clear to me why you are asking. If this question is not about tax, then what problem are you trying to solve, exactly? Who will be looking at what standards you followed, if not the tax man? Also, what does "GASP" stand for, in your title? – Chris W. Rea Mar 26 '14 at 19:15
  • 1
    I'd like to know how this is a question about a practical problem you face in personal finance. – George Marian Mar 27 '14 at 02:09
  • 1
    And if it's a tax question, where? In the USA it is required to list value of inventory on Schedule C. – Bryce Mar 27 '14 at 06:47
  • GASP Oops Should Be GAAP. Brain fart. Generally Accepted Accounting Practices.

    I have a sole propropriator business -- a farm. There is no distinction between business and personal for a proprpriator business in Canda.

     – Sherwood Botsford Mar 27 '14 at 19:24
  • I'm in Canada. The purpose of accounting is to understand where you are, where you have been, and what you can do. It has a secondary purpose of keeping the tax man happy. It has another purpose of being able to define what the business is, and how well it works when the time comes to sell the business. – Sherwood Botsford Mar 27 '14 at 19:26
  • I'm asking: How do you account for inventory when things take a very long time to make with very low imput costs. – Sherwood Botsford Mar 27 '14 at 19:28

1 Answers1

1

First, please allow me to recommend that you do not try gimmickry when financials do give expected results. It's a sure path to disaster and illegality. The best route is to first check if accounts are being properly booked. If they are then there is most likely a problem with the business. Anything out of bounds yet properly booked is indeed the problem.

Now, the reason why your results seem strange is because investments are being improperly booked as inventory; therefore, the current account is deviating badly from the industry mean.

The dividing line for distinguishing between current and long term assets is one year; although, modern financial accounting theorists & regulators have tried to smudge that line, so standards do not always adhere to that line.

Therefore, any seedlings for resale should be booked as inventory while those for potting as investment. It's been some time since I've looked at the standards closely, but this used to fall under "property, plant, & equipment". Generally, it is a "capital expenditure" by the oldest definition.

It is not necessary to obsess over initial bookings because inventory turnover will quickly resolve itself, so a simple running or historical rate can be applied to the seedling purchases.

The books will now appear more normal, and better subsequent strategic decisions can now be made.