Inventory reserves;

              Accounting Research BULLETINS
No. 31
Inventory Reserves
Issued by the Committee on Accounting Procedure, American Institute of Accountants 270 Madison Avenue, New York 16, N. Y. Copyright 1947 by American Institute of Accountants
1. Reserves designed to set aside a part of current profits to absorb losses feared or anticipated in respect to inventories on hand, or in connection with future purchases, are the subject of this bulletin. Charges to provide, either directly or by use of a reserve, for obso-lescence, deterioration, or similar losses, or for reducing an inventory to market, or for reducing an inventory to a recognized basis such as last-in first-out or its equivalent in accordance with an announced change in policy to be consistently followed thereafter, are regarded as proper charges to income, and are not under consideration in this bulletin. The committee has already dealt with reserves arising out of the war,1 and with general purpose contingency reserves.2
2. The committee has previously3 recognized the character of the income statement as a tentative installment in the long-time financial results, and is aware of the tendency to exaggerate the sig-nificance of the net income for a single year. Nevertheless, there still exists the responsibility for determining net income as fairly as possible by sound methods consistently applied, and the duty to show it clearly.
3. In accomplishing this objective, it has been deemed desirable
to provide, by charges in the current income statement, properly
classified, for all foreseeable costs and losses applicable against cur-
rent revenues, to the extent that they can be measured and allocated
to fiscal periods with reasonable approximation.4 In applying this rule, inventories on hand or contracted for should be priced in accordance with principles recently stated by the committee.5 When
1 Accounting Research Bulletins Nos. 13 and 26. 2Accounting Research Bulletin No. 28. 3Accounting Research Bulletin No. 8, p. 64. 4Accounting Research Bulletin No. 13, p. 111. 5Accounting Research Bulletin No. 29.
2 5 5
October, 1947