Inventory and Cost of Goods Sold - The Rules Are Old

I have been reading lately commentary about how old many accounting principles really are. There are some parts of Generally Accepted Accounting Principles that have not changed in over 50 years. Think about how much things have changed in that period of time. Why hasn't GAAP caught up?

The rules for inventory and cost of goods sold are pretty old too - those rules are pretty much set out by ARB 29, which came out in 1947. You may have heard of the Financial Accounting Standards Board. FASB was preceded by the Accounting Principles Board. The APB was preceding by Accounting Research Bulletins, as in ARB 29.

But as I'm thinking about the accounting rules for inventory and how they affect a ready-mixed concrete operation, I think we're ok. The typical producer does not have a huge amount of inventory. You are limited in how much cementitious material you can have simply by the size of your silos. The aggregate stockpiles are generally limited by available space. If the producer is managing things right, inventory turns very quickly. The cost for inventory on the balance sheet will generally be a good reflection of what the inventory actually cost.

Compare this scenario to a business that maintains a broad parts inventory, many of which are for hard to find items. Such a business needs to keep items on hand - they can't easily afford to be out of stock on these items, especially if that is there marketing edge. Current inventory rules probably don't cut it for them.

The rules might change down the road, but here they are giving the producer good numbers.