Question

Inventories of a business firm do not include

• A. Raw material
• B. Work in progress
• C. Finished goods
• D. Bills receivable

Answer 1

Answer:

D. Bills receivable

Understanding Inventories in Business Accounting

• Definition: Inventories represent the tangible assets held by a business for the purpose of sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or in the rendering of services.
• Components of Inventory: Inventory typically includes
  • Raw Materials: Basic materials used in production.
  • Work-in-Progress (WIP): Goods in the process of manufacturing.
  • Finished Goods: Completed products ready for sale.
  • Consumables/Stores and Spares: Auxiliary items used during production.
• Financial Classification: Inventories are categorized as Current Assets on the Balance Sheet because they are expected to be converted into cash within one operating cycle.
• Why Bills Receivable are Excluded:
  • Nature of Bills Receivable: A Bill Receivable is a financial instrument or a negotiable instrument (a formal written order/promise) acknowledging a debt owed to the business by a customer.
  • Classification: It is classified as a Trade Receivable, not as physical inventory.
  • Accounting Distinction: While both inventories and receivables are current assets, they serve different functions. Inventory represents physical goods, whereas Bills Receivable represent a claim against a customer for goods already sold on credit.
• Exam Tip: In accounting standard AS-2 (Valuation of Inventories), it is explicitly stated that inventory does not include financial instruments like Bills Receivable, Cash, or Bank balances.