Inventory And Its Importance Inventory is defined as goods that are available for sale within an accounting period.

It is a current asset. Inventory is the goods that you offer to the public, it is important that you keep accurate records of inventory so you know what it is that you have available. There are many different ways that you can control the inventory in a business, from barcodes and scanners to point of sale systems, however, sometimes even those systems have inaccuracies. The best way to know what inventory you have is to count it by hand. The amount of inventory that you have on hand at the end of your accounting period will be known as your starting inventory for the next accounting period. For example, if you have a 15 000.00 inventory amount at the end of your annual fiscal period and you end in December, your starting inventory will be $15000.00 in January of the next year. In addition a physical inventory count will allow you to identify inaccuracies through theft, spoilage, damage, losses and so on. There are two different ways to control and maintain your inventory: 1. Perpetual Inventory System- A method of accounting for inventory that records the sale or purchase of inventory in near real-time, through the use of computerized point-of-sale and enterprise asset management systems. Perpetual inventory provides a highly detailed view of changes in inventory and allows real-time reporting of the amount of inventory in stock, hence, accurately reflecting the level of goods on hand. A perpetual inventory system is superior to the older periodic inventory systems because it allows for real-time tracking of sales as well as inventory levels for individual items, helping to prevent stock outs. A perpetual inventory also does not need to be adjusted manually by the company's accountants except to the extent it disagrees with the physical inventory count due to loss, breakage or theft. 2. Periodic Inventory System - A method of inventory valuation for financial reporting purposes where a physical count of the inventory is performed at specific intervals. This accounting method for inventory valuation only keeps

track of the inventory at the beginning of a period, the purchases made and the sales during the same period and is recorded under the asset section of the balance sheet. With this valuation method, it is much harder to track which individual items were destroyed or stolen, but a cross-reference can be made with the sales revenue to get a rough estimate of what was sold versus what was not. Many see this method as being inferior to the perpetual inventory method, which keeps track of inventory at the point of sale. This system is typically used by small businesses that can't afford or don't need an electronic tracking system (i.e. the bar code system). In the end both systems work very well, however perpetual inventory methods can cost much more to manage!

Perpetual vs. Physical Inventory Use the following chart to compare and contrast the two types of inventory. Use the internet to do your research. Perpetual Cost Physical

Ease of Handling

Computerization

Hours Involved

Examples

Businesses that use each type

Determining the Quantity of Merchandise Inventory Read pages 564 567 and answer the following questions. 1. Why do successful businesses need an effective inventory system?

2. Identify four reasons why a merchandise inventory that is larger than needed may decrease the net income of a business.

3. When are periodic inventories usually taken?

4. How do inventory levels affect the period a business chooses for its fiscal period?

5. How is the accuracy of perpetual inventory checked?

6. Define the following terms:

Periodic Inventory

Perpetual Inventory

Inventory Record

Stock Record

Stock Ledger

7. Complete the following Stock Records. A stock record for Sound Station is given below. The beginning inventory is 250 Feet of Speaker Wire, Stock no. W-394. Enter the following transactions. i) Oct. 3 Sold 250 feet of W-394 Speaker wire. S2534 ii) Oct. 27 Purchased 750 feet of W-394 Speaker Wire. P1542 iii) Oct. 29 Sold 300 feet of W-394 Speaker Wire. S2801 iv) Dec. 4 Sold 170 Feet of W-394 Speaker Wire. S2654 Stock Record Description: ___________________ Reorder: Increases Date Purch. Inv. No. Qty Date Minimum: Stock No. Location: Decreases Sales Inv. No. Qty Balance Qty ________________

A stock record for Frames R Us is given below. Complete the record for Stock No. M253 an 8 X 10 white metal frame. Stock on hand is 45. i. ii. iii. iv. Nov. 4 Sold 10 M 253 picture frames. S590 Nov. 16 Sold 25 M-253 picture frames. S624 Nov. 22 Received 50 M-253 picture frames. P223. Dec 9. Sold 15 M-253 picture frames S654. Stock Record Description: ___________________ Reorder: Increases Date Purch. Inv. No. Qty Date Minimum: Stock No. Location: Decreases Sales Inv. No. Qty Balance Qty ________________