Inventories

Inventory and Income measurement

Value of ending inventory will affect the cost of goods
sold and thereby gross profit and net profit
Ending inventory of a period is the opening inventory
of next period
Self reversing effect on profits
Periodic Inventory
Determining the physical inventory – physical count
Goods in transit
Goods in consignment
Perpetual and Periodic Inventory Methods
In perpetual inventory method, record need to be
maintained for each item carried in inventory.
Periodic more suitable for business dealing with
numerous low cost items
Development of Electronic point-of- sale terminals
has led many stores to change to Perpetual Inventory
method
Inventory shrinkage can be identified separately in
Perpetual which it is buried in cost of goods sold in
Periodic method
Walmart
Largest retailer of the world
8416 stores in 15 countries
Serves more than 200 million customers per week
Given the large volume of merchandise, Profits
depend heavily on the control and management of
inventory
Almost 69% of current asset is inventory.
Inventory management
Less inventory- Loss of sales
Too much inventory- Storage, interest cost, risk of
obsolescene
Walmart and HUL –use of effective technology to
manage and control inventory
Inventory Management
For large companies, inventories are composed of
thousands of different products or materials and
millions of individual units that are stored in hundreds
of different locations.
Vast and varied inventories
Key performance measures- Inventory growth to sales
growth
Walmart in 2009- sales grew by 4% but inventory by
only 1%.
HUL inventory Management
An IT-powered system implemented to supply stocks
to redistribution stockists on a continuous
replenishment basis.
The objective right product is available at the right
place in right quantities, in the most cost-effective
manner.
Stockists have been connected with the company
through an Internet-based network,
Inventory Systems
Track the level of inventory
Signal the need for additional purchases
Special efforts required to sell existing inventory
Provide information to safeguard inventory from theft
or misappropriation
Perpetual System
Point of Sale cash register, optical bar code scanners
and RFID (Radio frequency id tags) has made
implementation of Perpetual system easier
Perpetual System –Journal Entries
Purchases
Merchandise Inventory
Cash/Trade Payable
Sales
Two transactions when sales take place
Asset increases (Cash/ Receivable)
Revenue increases

Second transaction
Cost of the goods sold reduces the inventory asset
account and becomes expense.
Perpetual System –Journal Entries
On Sales – two entries are passed
Cash/Receivable
sales

Cost of Goods sold

Inventory
Inventory Costing Methods
Specific Identification
FIFO (First In First Out)
WAC (Weighted Average Cost)
LIFO (Last In First Out)

Cost or Net realizable value whichever is lower

Definition
Inventories are assets
 Held for sale in the ordinary course of business
 In the process of production of such sale
 In the form of materials or supplies to be consumed in
production process or in the rendering of services
Inventory
Raw materials
Work in progress/process
Finished goods
Stores, consumables and other packing material etc
Cost of Inventory
Cost of Inventory includes
Cost of purchase (purchase price, duties and taxes,
freight inward)
Cost of conversion
All other costs incurred in bringing the inventories to
present location and condition