Business Systems

Sales and Inventory Systems

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SALES AND INVENTORY SYSTEMS

From this point forward, the students must learn and apply the business
processes to develop a computer-based system. They should have a
background on the different business transactions. It would be
impossible for them to create such systems if they do not know the
logical flow of the processes.
The two Sales Systems concepts are very much related to each other
especially in the retail type of business. There is another type of
inventory system wherein it focuses on the manufacturing type of
business.
On why sales should be connected to an inventory system, the reason is
that there is a link between the two since the quantity of products in the
warehouse or stockroom is lessened when a sales transaction occurs.
The first type of business process that will be discussed is the Inventory
control processes and concepts.

Inventory Control Processes and

Concepts
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[Sales and Inventory Systems, Page 1 of 20]

Inventory Control Processes and Concepts
What is Inventory?
Inventory is defined as a company's merchandise, raw materials, and
finished and unfinished products which have not yet been sold. It is
considered as the lifeblood of the business since a list of goods that a
business has on hand for sale to their customers. In a manufacturing
firm, this may be both raw materials and finished goods. In a retail
business, inventory may be considered as the items for resale.
[Inventory Control Processes and Concepts, Page 2 of 20]
Inventory Terminologies
There are several inventory terminologies wherein students must
understand and be familiar with. To enumerate some are:
Category

Inventory Terminologies
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Product
Physical
counting

A group of items that are related; may also be

considered as classification; example: canned
goods, plastic ware, etc.
The term used to describe all goods and services
sold which is under a certain category
The determination of inventory quantity by actual
count. Annual physical count is done when
business transactions are halted and personnel
would go to the stockroom and count the number of
items. An alternative is cycle counting wherein the
accuracy of inventory records is checked by
determining a small group of items. This small group
will be counted daily and checked with the records.

[Inventory Terminologies, Page 3 of 20]

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Inventory Terminologies (cont.)
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Inventory Terminologies (cont.)

Backorder

An unfilled customer order or commitment. A

backorder is an immediate (or past due) demand
against an item whose inventory is insufficient to
satisfy the demand.
Economic
EOQ is calculated to balance expected cost of
order
acquisition for stock against the expected costs to
quantity (EOQ) hold the stock.
Finished
A product sold as a completed item or replacement
goods
part; any item subject to a customer order or sales
forecast.
Reorder
Sum of the forecasted requirements during
point (ROP)
replenishment lead time plus a safety stock
Safety stock
Amount of stock planned to be available to protect
against uncertainty in demand or stock.
[Inventory Terminologies (cont.), Page 4 of 20]
Inventory Terminologies (cont.)
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Inventory terminologies (cont.)

Stock status
Raw Materials
Work in
process (WIP)

A report of what is on hand, what is due in and what

is owed to customers
Items to purchased by the company to be converted
to finished goods via a manufacturing process
May also be called work in progress or in-process
inventory; refers to the raw materials that have
started the value-adding activity in the manufacturing
plant. This may also be referred to the raw materials
that have been moved from the storage area to the
working place.

[Inventory Terminologies (cont.), Page 5 of 20]

Inventory Terminologies (cont.)

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Inventory Terminologies (cont.)

Lead time
Fast-moving
items
Slow-moving
items

Number of days or amount of time needed between

ordering and receiving goods
Items that must be immediately placed by the
company to their suppliers to avoid out-of-stock
situation.
Products that do not meet the number of products
that must be sold in given number of time.

[Inventory Terminologies (cont.), Page 6 of 20]

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Inventory Processes
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Inventory Processes
To illustrate, an inventory system handles the following functions:
1. Monitoring of stocks whether items are out-of-stock, below the
reorder point, or overstocked. If the items are out-of-stock or
below the reorder point, a Purchase Order (PO) should be
prepared requesting the needed materials.
2. Ordering of raw materials (for manufacturing) or goods (for
resale) from suppliers. Once the PO is finalized, the prepared
PO is then forwarded to the suppliers. A sequential and unique
PO number is generated to serve as reference for delivery later
on. The number of items to be reordered is based on the EOQ.
Note that the lead time is needed to compute for the EOQ.
3. Replenishment of quantity and updating of records of items once
orders are delivered to the company. A Delivery Receipt (DR) or
Receiving Slip from your supplier will be forwarded to your
company. This will be the basis on how much quantity will be
added to your current stocks-on-hand. In case the quantity
delivered is not complete, a backorder occurs.
4. Monitoring of Invoice for billing purposes. An invoice is defined
as document that contains the PO number as reference, names
and addresses of the buyer and the seller, the date and terms of
the sale, a description of the goods, the price of the goods, and
the mode of transportation used to ship the goods. The seller
calls the invoice a sales invoice; the buyer calls it a purchase
invoice.
[Inventory Processes, Page 7 of 20]

Inventory Processes (cont.)

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Inventory Processes (cont.)

5. Physical counting of stocks-on-hand; either through annual
physical counting or cycle counting.
6. Adjustment of inventory; in cases where there is a discrepancy
between the actual physical count and stock status report, an
adjustment is recorded using a Stock Adjustment Form to
reconcile the records.
7. Generation of reports; several reports can be generated from the
database. To enumerate some are:
Detailed inventory report
Summarized inventory report
Reorder List
Item Master List
Purchase Order List
Adjustment report
Fast-moving and slow-moving items report
Back order List
[Inventory Processes (cont.), Page 8 of 20]

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Inventory Documents
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Inventory Documents
Several documents have been enumerated earlier. It would be just for
the students to see how each of them looks like and what the use for
each. The succeeding section enumerates all the important documents
used in an inventory processing.
1. Purchase Order - A formal request to a vendor to purchase
goods or services. This document may be sent in either
hardcopy or electronic format.

2. Receiving slip

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3. Invoice

4. Requisition and Issue slip

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5. Stock Adjustment

6. Transfer order

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7. Re-order List

8. Item Master List

9. Stock Status Report

[Inventory Documents, Page 9-16 of 20]

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Stock Card
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Stock Card
In current manual system, one important document that is used is the
Stock Card. The document is an individual record of every item in the
item master list. It shows the date when the goods came in; view the
movement on stock per item, location and period. The document
displays all the movement of items sold, purchased, returned,
assembled, and transferred.

[Stock Card, Page 17 of 20]

Inventory Valuation Methods
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Inventory Valuation Methods

The accounting method that a company decides to use to determine the
costs of inventory can directly impact the balance sheet, income
statement, and statement of cash flow. There are three inventory-costing
methods that are widely used by both public and private companies:

First In, First-Out (FIFO) - This method assumes that the first
unit making its way into inventory is the first sold. For example,
let's say that a bakery produces 200 loaves of bread on Monday
at $1 each, and 200 more on Tuesday at $1.25 each. FIFO
states that if the bakery sold 200 loaves on Wednesday, the cost
of goods sold is $1 per loaf because that was the cost of each
the first loaves into inventory. The $1.25 loaves would be
allocated to ending inventory (appears on the balance sheet).

Example
A bakery produces 100 loaves of bread on Monday at Php18.00
each, and 100 more on Tuesday at Php22.00 each.
FIFO states that if the bakery sold 100 loaves on Wednesday,
the cost of goods sold is Php18.00 per loaf because that was the
cost of each the FIRST loaves into inventory.
The Php22.00 loaves would be allocated to ending inventory.
[Inventory Valuation Methods, Page 18 of 20]

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Inventory Valuation Methods
(cont.)
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Inventory Valuation Methods (cont.)

Last In, First-Out (LIFO) - This method assumes that the last
unit making its way into inventory is sold first. The outdated
inventory is therefore left over at the end of the accounting
period. For the 200 loaves sold on Wednesday, the same bakery
company would allocate $1.25 to cost of goods sold while the
remaining $1 loaves would be used to calculate the value of
inventory at the end of the period.

Example
A bakery produces 200 loaves of bread on Monday at Php18.00
each, and 200 more on Tuesday at Php22.00 each.
LIFO states that if the bakery sold 200 loaves on Wednesday,
the cost of goods sold is Php22.00 per loaf because that was the
cost of each the LAST loaves into inventory.
The Php18.00 loaves would be used to calculate the value of
inventory at the end of the period.
[Inventory Valuation Methods (cont.), Page 19 of 20]
Inventory Valuation Methods
(cont.)
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Inventory Valuation Methods (cont.)

Average Cost - This method is quite straight forward, it takes

the weighted average of all units available for sale during the
accounting period and then uses that average cost to determine
the value of cost of goods sold and ending inventory. In our
bakery example, the average cost for inventory would be $1.125
per unit, calculated as (200 x $1 + 200 x $1.25)/400.

The most important point in the examples above is that cost of goods
sold appears on the income statement, and ending inventory appears on
the balance sheet under current assets.
The reason why valuation is important in inventory is discussed in the
following section. If inflation is nonexistent, then all three of the inventory
valuation methods will produce the exact same results. When prices are
stable our bakery would be able to produce all of the loaves of bread at
$1, and FIFO, LIFO, and average cost would give us a cost of $1 per
loaf.
Unfortunately, the world is more complicated. Over the long term, prices
tend to rise, which means the accounting method can dramatically affect
valuation ratios.
If prices are rising, each of the accounting methods produce the
following results:

Sales and Inventory Systems

FIFO gives us a better indication of the value of ending inventory

(on the balance sheet), but it also increases net income because
inventory that might be several years old is used to value cost of
goods sold. Increasing net income sounds all good, but
remember that it also has the potential to increase the amount of
taxes that a company must pay.
LIFO isn't a good indicator of ending inventory value because
the left over inventory might be extremely old and perhaps
obsolete. This results in a valuation that is much lower than
today's prices. LIFO results in lower net income because cost of
goods sold is higher.

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Average cost produces results are somewhere in the middle

between FIFO and LIFO.

(Note: if prices are decreasing then the complete opposite is true.)

One thing to keep in mind is that companies are prevented from getting
the best of both worlds. If a company uses LIFO valuation when they file
their taxes, which results in lower taxes when prices are increasing, they
then must also use LIFO when they report financial results to
shareholders. This lowers net income and ultimately lowers earnings per
share.
Example
A bakery produces 200 loaves of bread on Monday at Php18.00
each, and 200 more on Tuesday at Php22.00 each.
The average cost for inventory would be Php20.00 per unit,
calculated as (200 x Php18.00 + 200 x Php22.00)/400.
[Inventory Valuation Methods (cont.), Page 20 of 20]

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