The Inventory Challenge.

Abstract Since the inception of the double entry bookkeeping system, the treatment of inventories has always been a rather perplexing problem. Even today accountants disagree, not merely on methods and procedures of treatment, but even on fundamental principles on inventory position and interpretation. This is a challenge to the accounting profession to which a satisfactory response is still missing, despite the flood of literature on inventory questions during the last decade. The main difficulty for a realistic contemplation of the problem stems, in the author's opinion, from the dualism inherent in the inventory account which influences both the balance sheet and the income statement. Withdrawn from the manufacturing costs on the income statement as closing inventory, it is added to the current assets on the balance sheet. In the light of the dualistic approach to the inventory problem, the exclusion argument for fixed costs seems to gain considerable ground. It seems now obvious that fixed charges, being mainly functions of time, have no place in an account of such diversified influences. Left partially in the inventory, fixed costs increase the gross and net profit, and, on the balance sheet, the working capital. This is hardly compatible with business logic. Fixed costs in the inventory are not a profit increasing factor; neither do they improve the working capital position. However, the traditional treatment must lead ultimately to such distortions of values and the possible benefit of the tax collector.