The inventory

1. Introduction

The basis of any commercial company is the purchase and sale of goods or services; hence the importance of inventory management by it. This accounting management will allow the company to maintain control in a timely manner, as well as to know at the end of the accounting period a reliable state of the economic situation of the company.

Now, the inventory constitutes the items of current assets that are ready for sale, that is, all those merchandise that a company owns in the warehouse valued at the cost of acquisition, for sale or productive activities.

Through the following research work, some basic concepts of everything related to Inventories in a company, methods, system and control will be disclosed.

2. What are inventories?

Inventory accounting is a very important part of merchandise accounting systems, because selling inventory is the heart of the business. Inventory is generally the largest asset on your balance sheets, and inventory expenses, called cost of goods sold, are usually the largest expense in the income statement.

The companies dedicated to the purchase and sale of merchandise, as this is their main function and the one that will give rise to all the other operations, will need constant summarized and analyzed information on their inventories, which forces the opening of a series of main and auxiliary accounts related to these controls. Among these accounts we can name the following:

Inventory (initial) Purchases Returns on purchase Purchase expenses Sales Returns on sales Goods in transit Goods on consignment or Inventory (final)

The Initial Inventory represents the value of merchandise stocks on the date the accounting period began. This account is opened when the inventory control, in the General Ledger, is carried out based on the speculative method, and does not return to movement until the end of the accounting period when it will be closed with a charge to cost of sales or for Profits and Losses. directly.

The Purchases account includes merchandise purchased during the accounting period in order to resell them for profit and that are part of the object for which the company was created. The purchase of Land, Machinery, Buildings, Equipment, Installations, etc. is not included in this account. This account has a debit balance, does not enter the company's balance sheet, and is closed by Profit and Loss or Cost of Sales.

Returns in purchase, refers to the account that is created in order to reflect all those purchased merchandise that the company returns for any circumstance; Although this account will decrease the purchase of merchandise, it will not be credited to the purchase account.

The expenses caused by the purchase of merchandise must be directed to the account entitled: Purchase Expenses. This account has a debit balance and does not enter the Balance Sheet.

Sales: This account will control all sales of merchandise made by the Company and that were purchased for this purpose. On the other hand we also have Returns for Sale, which is created to reflect the returns made by customers to the company.

On some occasions, especially if the company makes purchases abroad, we find that certain disbursements have been made or payment commitments (documents or money orders) have been made for merchandise that the company purchased but that, for reasons of distance or any other circumstance, They have not yet been received in the warehouse. To account for this type of operations, the account: Goods in Transit must be used.

On the other hand we have the account called Merchandise on Consignment, which is nothing more than the account that will reflect the merchandise that has been acquired by the company on "consignment", over which we do not have any property rights, therefore, the The company is not obliged to cancel them until they have been sold.

The Current (Final) Inventory is carried out at the end of the accounting period and corresponds to the physical inventory of the company's merchandise and its corresponding valuation. By relating this inventory to the initial one, with the net purchases and sales of the period the Gross Profits or Losses in Sales of that period will be obtained.

The internal control of inventories begins with the establishment of a purchasing department, which must manage the purchases of inventories following the purchasing process.

3. Inventory systems

The Perpetual Inventory System:

In the Perpetual Inventory system, the business maintains a continuous record for each inventory item. The records therefore show the inventory available at all times. Perpetual records are useful for preparing monthly, quarterly, or provisional financial statements. The business can determine the cost of ending inventory and the cost of goods sold directly from accounts without having to account for inventory.

The perpetual system offers a high degree of control, because inventory records are always up to date. Previously, businesses used the perpetual system primarily for high unit cost inventories, such as jewelry and automobiles; Today, with this method, administrators can make better decisions about the quantities to buy, the prices to pay for the inventory, the setting of prices for the client and the terms of sale to offer. Knowing the available quantity helps protect inventory.

The derivation of the balance of each account includes the inventory:

Initial balance

+ Increments (Purchases)

- Decreases cost of goods sold

= Final Balance

The balance of the inventory account under the perpetual system should result in the cost of the inventory available at any time.

Perpetual inventory records provide information for the following decisions:

1. Most furniture stores store merchandise in their warehouses, therefore employees cannot visually examine available merchandise and respond at the same time. The perpetual system will promptly indicate the availability of said merchandise.

2. Perpetual records alert the business to reorganize inventory when it is low.

3. If companies prepare financial statements monthly, perpetual inventory records show existing ending inventory, a physical count is not required at this time; however, a physical count is required once a year to verify the accuracy of the records.

Seats under the Perpetual System

In the perpetual inventory system, the business records inventory purchases by charging the inventory account. When the business makes a sale, two entries are required. The company records the sale in the usual way, charges cash or accounts receivable and pays the amount of the goods sold to sales revenue. The company also charges the cost of goods sold and pays the cost to inventory. The inventory charge (for purchases) serves to keep an updated record of available inventory. The inventory account and the cost of goods sold account have a current balance during the period.

Journal record

1. Credit purchases of $ 560,000:

Inventory $ 560,000

Accounts payable $ 560,000

2. Credit sales of $ 900,000 (cost $ 540,000):

- one -

Accounts receivable $ 900,000

Sales revenue $ 900,000

- two -

Cost of goods sold $ 540,000

Inventory $ 540,000

3. End of period entries:

No seats are required. Both inventory and cost of goods sold are up to date.

Registration in the Financial Statements

Income statements (partial):

Sales revenue $ 900,000

Cost of merchandise sold <$ 540,000>

Gross Margin $ 360,000

Final balance (partial):

Current Assets:

Cash $ xxx, xxx

Short-term investments $ xxx, xxx

Accounts receivable $ xxx, xxx

Inventories $ 120,000

Prepaid charges $ xxx, xxx

The Periodic Inventory System:

In the periodic inventory system the business does not keep a continuous record of the available inventory, rather, at the end of the period, the business makes a physical count of the available inventory and applies the unit costs to determine the cost of the final inventory. This is the inventory figure that appears on the Balance Sheet. It is also used to calculate the cost of goods sold. The periodic system is also known as the physical system, because it relies on the actual physical count of the inventory. The periodic system is generally used to account for inventory items that have a low unit cost. Low-cost items may not be valuable enough to warrant the cost of keeping an up-to-date record of available inventory. To use the periodic system effectively,the owner must have the ability to control inventory through visual inspection. For example, when a customer requests certain available quantities, the owner or administrator can view existing merchandise.

Seats under the Perpetual System

In the periodic system, the business records purchases in the purchasing account (as an expense account); For its part, the inventory account continues carrying the initial balance that was left at the end of the previous period. However, at the end of the period, the inventory account must be updated in the Financial Statements. A journal entry eliminates the Initial Balance, crediting it to Inventory and charging it to Profit and Loss. A second journal entry establishes the Final Balance, based on the physical count. The charge is to inventory, and the payment to Profits and Losses. These entries can be made in the closing process or as adjustments.

Journal record

1. Credit purchases of $ 560,000:

Inventory $ 560,000

Accounts payable $ 560,000

2. Credit sales of $ 900,000 (cost $ 540,000):

- one -

Accounts receivable $ 900,000

Sales revenue $ 900,000

3. End of period entries to update the inventory:

- one -

Profits and Losses $ 100,000

Inventory (opening balance) $ 100,000

- two -

Inventory (ending balance) $ 120,000

Profits and Losses $ 120,000

Registration in the Financial Statements

Income statements (partial):

Sales revenue $ 900,000

Cost of merchandise sold:

Initial Inventory $ 100,000

Purchases $ 560,000

Final Inventory <$ 120,000>

Cost of goods sold $ 540,000

Gross Margin $ 360,000

Final balance (partial):

Current Assets:

Cash $ xxx, xxx

Short-term investments $ xxx, xxx

Accounts receivable $ xxx, xxx

Inventories $ 120,000

Prepaid charges $ xxx, xxx

Inventory Cost Calculation

Inventories are normally accounted for at historical cost, as required by the cost principle. Inventory cost is the price the business pays to acquire the inventory, not the sale price of the goods.

Inventory cost includes invoice price, less any purchase discounts, plus sales tax, import duties, transportation charges, insurance while in transit, and all other costs incurred to get them goods are available for sale.

4. Inventory costing methods

Businesses multiply the number of items in inventories by their unit costs to determine the cost of inventories. The inventory costing methods are: specific unit cost, weighted average cost, cost of first entries first departures (PEPS), and cost of last entries first departures (UEPS).

Specific Unit Cost:

Some companies deal with individually identifiable inventory items, such as cars, jewelry, and real estate. These companies generally pay their inventories at the specific unit cost of the particular unit. For example, a car dealer has two vehicles on display; an "x" model that costs $ 14,000 and an equipped "y" model that costs $ 17,000. If the dealer sells the equipped model for $ 19,700; the cost of merchandise sold is $ 17,000 the specific cost of the unit; the gross margin on this sale is $ 2,700 ($ 19,700 - $ 17,000). If car "x" is the only one left in the inventory available at the end of the period, the ending inventory is $ 14,000.

Weighted Average Cost:

The weighted average cost method, often called the average cost method, is based on the weighted average cost of inventory during the period. This method weights the cost per unit as the average unit cost during a period, that is, if the cost of the unit falls or rises during the period, the average of these costs is used. The average cost is determined as follows: Divide the cost of the goods available for sale (starting inventory + purchases) by the number of units available. Calculate ending inventory and cost of goods sold by multiplying the number of units by the average cost per unit. If the cost of merchandise available for sale is $ 90,000 and 60 units are available, the average cost is $ 1,500 per unit.The ending inventory of 20 units of the same item has an average cost of $ 30,000 (20 x $ 1,500 = $ 30,000). The cost of goods sold (40 units) is $ 60,000 (40 x $ 1,500 = $ 60,000).

Cost of First Entries, First Exits (PEPS):

Under the first-in, first-out method, the company must keep track of the cost of each unit purchased from inventory. The unit cost used to calculate the ending inventory may be different from the unit costs used to calculate the cost of the goods sold. Under PEPS, the first costs that enter the inventory are the first costs that go out to the cost of the merchandise sold, that is the reason for the name of First Entries, First Exits. The ending inventory is based on the costs of the most recent purchases.

Cost of Last Entries, First Departures (UEPS):

The last entry, first exit method also depends on the costs of purchasing a particular inventory. Under this method, the last costs that go into inventory are the first costs that go out to the cost of goods sold. This method leaves the oldest costs (those of the initial inventory and the first purchases of the period) in the final inventory.

Part A: Illustrative Information

Initial Inventory (10 units @ $ 1,000 per unit) $ 10,000

Purchases:

# 1 (25 units @ $ 1,400 per unit) $ 35,000

# 2 (25 units @ $ 1,800 per unit) $ 45,000

Total $ 80,000

Cost of merchandise available for sale (60 units) $ 90,000

Final inventory (20 units @ $? Per unit) $?

Cost of goods sold (40 units @ $? Per unit) $?

Part B: Final inventory and cost of goods sold

Weighted average costing method

Cost of merchandise available for sale (see Part A) * $ 90,000

* 60 units @ weighted average cost of $ 1,500 per unit; $ 90,000 / 60Und

Final inventory (20 units @ $ 1,500 per unit) <$ 30,000>

Cost of goods sold (40 units @ $? Per unit) $ 60,000

PEPS costing method

Cost of merchandise available for sale (see Part A) $ 90,000

Final inventory (cost of the last 20 units available) * <$ 36,000>

* 20 units @ $ 1,800 per unit of purchase # 2

Cost of goods sold:

10 units @ $ 1,000 (all from starting inventory) $ 10,000

25 units @ $ 1,400 (all from purchase # 1) $ 35,000

5 units @ $ 1,800 (from purchase # 2) $ 9,000

Total Goods Sold $ 54,000

UEPS costing method

Cost of merchandise available for sale (see Part A) $ 90,000

Final inventory (cost of the last 20 units available)

10 units @ $ 1,000 (all from starting inventory) $ 10,000

10 units $ 1,400 (from purchase # 1) $ 14,000

Total ending inventory <$ 24,000>

Cost of goods sold:

25 units @ $ 1,800 (all from purchase # 2) $ 45,000

15 units @ $ 1,400 (from purchase # 1) $ 21,000

Total Goods Sold $ 66,000

Internal Control over Inventories

Internal control over inventories is important, as inventories are the circulatory system of a marketing company. Successful companies take great care to protect their inventories. Elements of good internal inventory control include:

1. Physical inventory count at least once a year, no matter which system is used

2. Efficient maintenance of purchases, reception and shipping procedures

3. Inventory storage to protect against theft, damage or decomposition

4. Allow access to inventory only to personnel who do not have access to accounting records

5. Maintain perpetual inventory records for high unit cost goods

6. Buy inventory in cheap quantities

7. Maintain sufficient inventory on hand to prevent deficit situations, leading to sales losses

8. Not keeping inventory stored too long, thereby avoiding the expense of having restricted money on unnecessary items