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 actually 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 – Recorded inventory physically exists
2. Rights and Obligations – 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 realizable value, obsolescence)

Find more free resources related to ACCA AA here

YOU can find helpful exam focussed video lecture on our Youtube channel