inventory

Examples of inventory in the following topics:

• Perpetual vs. Periodic Counting

  • Perpetual inventory updates the quantities continuously and periodic inventory updates the amount only at specific times, such as year end.
  • A company using the perpetual inventory system would have a book inventory that is exactly (within a small margin of error) the same as the physical (real) inventory.
  • Physical inventories are conducted at set time intervals; both cost of goods sold and the inventory are adjusted at the time of the physical inventory.
  • Perpetual inventory systems can still be vulnerable to errors due to overstatements (phantom inventory) or understatements (missing inventory) that occurs as a result of theft, breakage, scanning errors, or untracked inventory movements.
  • While the perpetual inventory method provides a close picture of the true inventory information, it is a good idea for companies using a perpetual inventory system to do a physical inventory periodically.

• Reporting Inventories

  • Companies must choose a method to track inventory.
  • The perpetual inventory system requires accounting records to show the amount of inventory on hand at all times.
  • In the periodic inventory system, sales are recorded as they occur but the inventory is not updated.
  • Regardless of what inventory accounting system is used, it is good practice to perform a physical inventory at least once a year.
  • Inventory itself is not an income statement account.

• Conducting a Physical Inventory

  • Physical inventory is a process where a business physically counts its entire inventory.
  • In addition, inventory control system software can speed the physical inventory process .
  • A perpetual inventory system tracks the receipt and use of inventory, and calculates the quantity on hand.
  • The teams count the inventory items and record the results on an inventory-listing sheet.
  • An inventory control system ensures that the company's books reflect the actual inventory on hand.

• Efficiency Metrics

  • Efficiency ratios for inventory measure how effectively a business uses its inventory resources.
  • In addition, excess inventory increases the risk of losses due to price declines or inventory obsolescence.
  • Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory (to calculate average inventory, add the balances of beginning and ending inventory and divide by 2)
  • The inventory turnover ratio is a measure of the number of times inventory is sold or used in a time period, such as a year.
  • The inventory conversion ratio is a measure of the number of days in a year it takes to sell inventory or convert it into cash.

• Methods in Retail Inventory

  • For some companies, taking a physical inventory is impossible or impractical so the Retail Inventory Method is used to estimate.
  • Note that both the gross margin and the retail inventory methods can help you detect inventory shortages.
  • The advantage of this method is that companies can estimate ending inventory (at cost) without taking a physical inventory.
  • Because RIM only provides an approximation of inventory value, physical inventory must also be performed periodically to ensure the accuracy of inventory estimates due to issues such as shoplifting.
  • The steps for finding the ending inventory by the retail inventory method are:

• Internal Controls

  • Companies should store inventory in secure, spacious warehouses so that inventory is not stolen or damaged.
  • An inventory management system is a series of procedures, often aided by computer software, that tracks assets progression through inventory.
  • The benefit of a properly used and maintained inventory management system is that it allows management to be able to know how much inventory it has at any given time.
  • Cycle counts contrast with traditional physical inventory in that a full physical inventory may stop operation at a facility while all items are counted at one time.
  • Explain how a company would use storage, inventory management systems and inventory counts to control inventory

• Gross Profit Method

  • An inventory valuation allows a company to provide a monetary value for items that make up their inventory.
  • In perpetual inventory the accounting records must show the amount of inventory on hand at all times.
  • Periodic inventory is not updated on a regular basis.
  • While the best way to value inventory is to perform a physical inventory, in certain business operations, taking a physical inventory is impossible or impractical.
  • There are two methods to estimate inventory cost, the retail inventory method and the gross profit method.

• Inventory Turnover Ratio

  • Inventory turnover is the measure of the number of times inventory is sold or used in a time period such as a year.
  • In accounting, the inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year.
  • Inventory turnover is also known as inventory turns, stockturn, stock turns, turns, and stock turnover.
  • Inventory turnover measures the efficiency of the firm in managing and selling inventory: thus, it gauges the liquidity of the firm's inventory.
  • A high turnover rate may conversely indicate inadequate inventory levels, which may lead to a loss in business as the inventory is too low.

• Advantages of LIFO

  • FIFO: (+) Higher value of inventory (-) Lower cost of goods sold
  • LIFO: (-) Lower value of inventory (+) Higher cost of goods sold
  • FIFO: (-) Lower value of inventory (+) Higher cost of goods sold
  • LIFO: (+) Higher value on inventory (-) Lower cost on goods sold
  • Due to LIFO's potential to skew inventory value, UK GAAP and IAS have effectively banned LIFO inventory accounting.

• Lower of Cost or Market

  • Lower of cost or market (LCM) is an approach to valuing and reporting inventory.
  • Thus, the inventory has lost value.
  • Any loss resulting from the decline in the value of inventory is charged to cost of goods sold (COGS) if non-material, or loss on the reduction of inventory to LCM if material.
  • A company may apply LCM to each inventory item (such as Monopoly), each inventory class (such as games), or total inventory.
  • Explain how a would use the Lower of Cost or Market to value inventory