- 27 Sep, 2020
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Unit 5 Discussion: Inventory Control
It is important that inventory be recorded and valued properly. Different inventory costing methods are used to help accountants assign the cost of goods available for sale. There are different ways of costing and valuing inventory. The most common method used to value inventory is the FIFO method. The FIFO method, also called First in First out, takes the costs of the earliest units acquired and charges them to COGS (Costs of goods sold) and leaves the most recent units purchased in ending inventory. Basically, inventory purchased first will be used when selling any products. However, there are other methods used to value inventory such as: LIFO (Last in First out), Specific Identification method, and weighted average method. Companies incur several different costs if inventory is not monitored or controlled such as: transportation, warehouse, and obsolete costs. Last, companies have to take into account the cost of inventory shrinkage. Inventory shrinkage happens due to misplacing or losing inventory, theft, defects, and deterioration. Inventory shrinkage is generally determined when a physical count of inventory is taken and compared to what is listed in the General ledger and Trial Balance. The adjustments affect the Income statement through COGS and the Balance Sheet through inventory. Overstating or understating either one will affect the financial statements (Wild, Shaw, & Chiappetta, 2015).
Companies can use either a periodic or perpetual accounting system. You will find that most companies use a perpetual system because it updates inventory in real time. A good example to use is a retail store. As the product moves through the company or warehouse it’s being tracked by the accounting system under a perpetual inventory. When the item is purchased at the point of sale the system will update the inventory. Small business owners that typically deal with small amounts of inventory use a periodic system. Seasonal businesses also generally use a periodic system as well.
As you have learned this week inventory is a very important asset to a company. Inventory valuation must be accurately reported in order for financial statements to reflect the most current and accurate numbers.
Discussion Questions
Please discuss the following information in your initial post:
Imagine you own a business. What is the nature of your business?
Which inventory method would you use for your business? Explain this method and your reasons for choosing this method.
Based on your business, would it be better to use a periodic or perpetual accounting system? Why?
How is ending inventory treated under the method you chose? How will the costing method you chose affect the financial statements?
Do you think conducting a physical inventory is necessary? Why or why not? Do you feel the inventory values will be accurately reflected in the financial statements?
What happens if inventory isn’t managed correctly? What are some ways that you can manage your inventory?
Provide an appropriate subject bar that captures our interest and gives us an idea as to what your post is about.
Be sure to cite any sources that you use with APA. Wikipedia is not an acceptable source.
It is important to stay current in discussion threads. When you respond to your classmates, analyze the inventory method they chose. Does this method make sense based on the business they described? Based on your classmates’ information, note one concept you learned about how to conduct an inventory. Please make sure that your replies are “value-added.” Be sure to field any questions and comments we make to your own post.