Accounting is a technique used to systematically and structurally produce financial information expressed in monetary units so that third parties can make decisions about the results. As an art, it is the art of keeping track of a company's quantity and date.
Accounting is based on principles and laws to achieve an objective that is directly linked to the decision-making of the company's executives based on financial information at the end of the company's fiscal year.
It uses as a basis the economic transactions of the company such as invoices, receipts, checks, debit and credit notes, etc., to begin recording it in the "company books", and then begin the accounting process that begins with the record the transactions in the journal entries, then go to the general ledger, then make the trial balance and then the financial statements (income statement, cash flow statement and balance sheet).
Types of Inventories
Inventories are important to manufacturers in general, and varies widely between different industry groups. The composition of this part of the asset is a great variety of articles, and that is why they have been classified according to their use in the following types:
• Raw Material Inventories
• Production Inventories in Process
• Inventories of Finished Products
• Inventories of Materials and Supplies
Commodity Inventories
In all industrial activity a variety of articles (raw materials) and materials concur, which will undergo a process to finally obtain a finished or finished article. The materials that intervene to a greater extent in production are considered «Raw Materials», since their use is made in sufficiently large quantities of the finished product. The Raw Material is that or those articles subjected to a manufacturing process that will ultimately become a finished product.
Inventories of Products in Process:
The inventory of products in process consists of all the articles or elements that are used in the current production process. That is, they are partially finished products that are in an intermediate degree of production and to which the direct labor and indirect costs inherent in the production process at a given time were applied.
One of the characteristics of the Production in Process Inventory is that the value increases as it is transformed from raw material into the finished product as a consequence of the production process.
Finished Products Inventory:
These include the articles transferred by the production department to the finished products warehouse, as these have reached their total completion level and that, at the time of the physical inventory taking, are still in the warehouses, that is, those that have not yet They have been sold. The inventory level of finished products will depend directly on sales, that is, its level is given by demand.
Materials and Supplies Inventory:
The inventory of materials and supplies includes:
• Secondary raw materials, their specifications vary according to the type of industry, an example for the brewing industry is, salts for water treatment.
• Consumer articles destined to be used in the operation of the industry, among these consumer articles the most important are those destined for operations, and are made up of fuels and lubricants, these in the industry have great significance.
• Items and materials for repair and maintenance of machinery and operating apparatus, repair items for their large volume need to be adequately controlled, the existence of these vary in relation to their needs.
Inventories
The subject of Inventories, in particular and as part of such a vital line in the assets of the company, has greater emphasis in some aspects such as: The Conception of what an inventory is, the role it plays in the company, its Real importance, the different types of inventory that exist or can be applied, the utility derived from applying them correctly and with the rigor required by each particular case.
General considerations
From time immemorial, Egyptians and other ancient peoples used to store large quantities of food to be used in times of drought or calamities. This is how the problem of inventories arises or arises, as a way of dealing with periods of scarcity. That they assure him the subsistence of life and the development of his normal activities. This form of storage of all the goods and food necessary to survive motivated the existence of inventories.
Inventory Concept:
According to Finney-Miller, in his book "Intermediate Accounting Course", Volume II, Page 225, a company's inventories are defined as the purchase of items in conditions for sale. Merchandise Inventories are found in businesses that have wholesale and retail sales. These businesses do not alter the form of the items they purchase to sell.
Another concept was extracted from bulletin No. 1, Accounting Principles and Standards on the audit of Prof. Maldonado's Inventories; And it goes like this: The Word inventory is used to name the set of those items of tangible personal property.
The term inventory includes the goods awaiting sale (the merchandise of a commercial company, and the finished products of a manufacturer), the articles in the process of production and the articles that will be consumed directly or indirectly in production. This definition of inventories excludes long-term assets subject to depreciation, or items that will be so classified when used.
Inventory Record
There are two methods or systems of inventory records, this means that when we buy the items that will compose our inventories, they can be registered in two different ways, which are the following:
1. Periodic or Physical Inventory registration system.
2. Perpetual Inventory records system.
In the periodic inventory system, the merchandise that is entered is registered in the purchase account with the objective of making a single adjustment entry to accumulate the cost of sale in a separate account.
In the Perpetual Inventory system, the merchandise that is entered is registered to the Inventory account directly. In this inventory method, a record is kept in such a way that it shows at each moment what is the existence and the amount or value of the articles in stock, that is, the charges or credits, or rather, the purchases and sales of Inventories are recorded as transactions or movements occur.
Inventory Valuation Methods
There are numerous acceptable bases for the valuation of inventories; some of them are considered acceptable only in special circumstances, while others are of general application.
Among the issues related to the valuation of inventories, the one of primary importance is consistency: Accounting information must be obtained by applying the same principles throughout the accounting period and during different accounting periods so that it is feasible to compare the States Financial of different periods and to know the evolution of the economic entity; as well as to compare with Financial Statements of other economic entities.
The main valuation bases for inventories are as follows:
• Cost
• Cost or Market, at the lowest
• Sale price
Cost Base for the valuation of inventories:
The Cost includes any additional costs necessary to place the items on the shelves. Incidental costs include the right to import, freight or other transportation, storage, and insurance expenses, while the articles and / or raw materials are transported or are in warehouse, and the occasional expenses for any aging period.
Cost Base or Market, the lowest:
The market price can be determined on any of the following bases, depending on the type of inventory in question:
1. Purchase or replacement base: this base applies to purchased merchandise or materials.
2. Replacement Cost Base: Applies to items in process, is determined based on market prices for materials, prevailing wage costs and current manufacturing costs.
3. Basis of realization: for certain inventory items, such as outdated merchandise or raw materials, or those collected from customers, a purchase or replacement value in the market may not be determinable and it may be necessary to accept, as a value market estimate the probable sale price, less all possible costs to be incurred to recondition the goods or raw materials and sell them with a reasonable profit margin.
Taking the above as a premise, we can say that the main inventory valuation methods are as follows:
• Identified cost
• Average cost
• First to Enter, First to Exit or «PEPS»
• Last to enter, First to Exit or «UEPS»
• Retailer Method.
Identified Cost Method:
This method can give the most exact amounts because the units in stock can be identified as belonging to certain acquisitions.
Average cost:
As its name indicates, the way to determine it is on the basis of dividing the accumulated amount of applicable expenditures by the number of items purchased or produced.
First-In-First-Out Method:
This method, also identified as "PEPS", is based on the assumption that the first articles and / or raw materials to enter the warehouse or production are the first to leave it.
Last Entry, First Exit or "UEPS" Method:
This method is based on the assumption that the last entries in the warehouse or the production process are the first items or raw materials to leave.
Retailer Method:
With the application of this method, the amount of inventories is obtained by valuing the inventories at sale prices, deducting the gross profit margin factors, thus obtaining the cost per group of articles produced.
For the operation of this method, it is necessary to take care of the following aspects:
• Maintain a control and review of gross profit margins, considering both new purchases and adjustments to the sale price.
• Grouping of homogeneous articles.
• Control of transfers of items between departments or groups.
• Physical inventories periods for the verification of the theoretical balance of the accounts and, where appropriate, make the adjustments that occur.
Selection of the Valuation System
Each company must select the valuation system most appropriate to its characteristics, and apply them consistently, unless there are changes in the original conditions, in which case the disclosure of the particular rules must be made.
For the modification of the valuation system, it must be taken into account that inventories may suffer important variations due to changes in market prices, obsolescence and slow movement of the items that are part of it, it is essential, to comply with the principle of realization.
Cost or Market Value, whichever is less, except that:
1. The cost or market value must not exceed the realization value and that
2. the market value must not be less than the realization value.
Bibliography
Source: "Elements of General Accounting". Author: Arévalo, Alberto
Source: Buenos Aires, Accounting Collection. Author: Neuner, John
Source: «Cost Accounting» Sixth Edition. Author: Johnson, Robert
Source: «Financial Administration» 1991 Edition.
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