1. Question 1:
Proficient:
Explain why proper inventory valuation is so important to the calculation of a company's "bottom line" net income.
A merchandise company must be sure it has properly valued it inventory for three reasons. If the ending inventory is overstated, cost of goods are unstated which leads to an overstatement of the gross margin and net income. Overstating the ending inventories also affect the current assets, total assets and retained earnings because any changes to the ending inventory is calculated dollar for dollar (ignoring any, income tax effects), in net income, current assets and retained earnings.
Secondly, when a company misstates its ending inventory in the current year, the company carries the misstatement forward to the next year; the reason for this is the ending inventory for the current year is the beginning inventory for the next year.
Finally, an error in one accounting period ending inventory, automatically causes an error in the net income in the opposite direction in the next period. After 2 years, however the error washes out and the assets and retained earnings are properly stated.
What is the meaning of taking a physical inventory and why is it important to take a physical inventory when using a perpetual inventory system.
A physical inventory means a company must take a count, weigh, measure or estimate the physical quantities of the goods on hand. The use of this ensures companies are accurately stating the quantity of on hand inventory. When companies utilize a perpetual inventory system there are able to obtain real time data regarding cost of goods sold and ending inventory, which makes calculating net income easier.
Events can cause the Inventory account balance to differ from th...
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Inventories: Measurement. (2014, January 1). What is Included in Inventory?. Retrieved May 8, 2014, from http://connect.mcgraw-hill.com/sites/0077328787/student_view0/ebook/chapter8/chbody1/what_is_included_in_inventory_.htm
Hermanson, R., Edwards, J., & Maher, M. (2010).Accounting principles: A business perspective. (Vol. 2). Textbook Equity inc. DOI: www.textbookequity.com
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Siegel Ph.D. CPA, Joel G.; Shim Ph.D., Jae K. (2010-02-01). Dictionary of Accounting Terms (Barron's Dictionary of Accounting Terms) (p. 129). Barron's Educational Series. Kindle Edition.
Donal E. Kieso, Wegandt J. Jerry, Warfield D. Terry. (2012). Intermediate Accounting. Hoboken, NJ: Wiley.
Inventory - The money that the system has invested in purchasing things which it intends to sell.
Averkamp, H. (2014, January 1). Accounting Principles | Explanation | AccountingCoach. AccountingCoach.com. Retrieved May 2, 2014, from http://www.accountingcoach.com/accounting-principles/explanation
Marshall, D.H., McManus, W.W. & Viele, D.F. (2011). Accounting: What the numbers mean (10 ed). New York, NY: The McGraw-Hill Companies, Inc.
Hermanson, R., Edwards, J., & Maher, M. (2010).Accounting principles: A business perspective. (Vol. 2). Textbook Equity inc. DOI: www.textbookequity.com
Inventory accounting is exceedingly important to a firm because inventories are a significant asset to the firm both in absolute size and proportion to all of the firm’s other assets. Furthermore, selling inventories more than its cost price represents the main source of a firm’s sustainable income. For a typical wholesaler or retailer there is only one inventory account called the Merchandise Inventory. For a manufacturing company there are three categories of inventory accounts which are Raw materials inventory, Work-in-process inventory and Finished goods inventory (Revsine, Collins, Johnson, Mittelstaedt & Soffer, 2015).
Weygandt, Kimmel, and Kieso (2008). Financial Accounting: A Focus on Fundamentals. John Wiley and Sons Inc.
An inventory valuation allows a company to provide a monetary value for items that make up their inventory. Inventories are usually the largest current asset of a business, and proper measurement of them is necessary to assure accurate financial statements. If inventory is not properly measured, expenses and revenues cannot be properly matched and a company could make poor business decisions.
Inventory is an important variable which exists at all areas of product manufacturing, distribution and sales in addition to being a major portion of total current assets of many organizations. Inventory represents almost 40% of total capital of industrial organizations (Moore, Lee and Taylor, 2003). It represent 33% of assets of the company and as much as 90% of working capital, (Sawaya Jr. and Giauque, 2006). Inventory is a major segment of total investment, it is important that good inventory management should be practiced so that organizational growth and return is ensured.
This shows how effectively inventory is managed by comparing the cost of goods sold with average inventory for the period.
Marshall, M.H., McManus, W.W., Viele, V.F. (2003). Accounting: What the Numbers Mean. 6th ed. New York: McGraw-Hill Companies.
Marshall, D. H., McManus, W. W, & Viele, D. (2002). Accounting: What the Numbers Mean. 5th ed. San Francisco: Irwin/McGraw-Hill.
Inventory or stock refers to the goods and materials that a business keep for the final purpose of resale or manufacturing. Inventory is a major part of the supply chains. In the manufacturers, inventory includes raw materials used to make and collect products. In resellers, it includes products that acquire to resell to customers. In either case, we need inventory to earn revenue. There are five basic reasons for keeping an inventory, which is Time, Seasonal Demand, Uncertainty, Economies of scale, and Appreciation in Value. Inventory proportionality is the goal of demand-driven inventory management.
Inventory management is a method through, which a business handles tangible resources and materials to ensure availability of resources for use. It is a collection of interdisciplinary processes including a full circle from the demand forecasting, supply chain management, inventory control and reverse logistics. Inventory management is the optimization of inventories of manufactured goods, work in progress, and raw materials. According to Doucette (2001) inventory management can be challenging at times; however, the need for effective inventory management is largely seeing more as a necessity than a mere trend when customer satisfaction and service have become a prime reason for a business to stand apart from its competition. For example, Wal-Mart’s inventory management is one of the biggest contributors to the success of the company;
Inventory management can enhance the efficiency in operation of the supermarket. Supermarket must ensure that the correct levels of inventory are being maintained throughout the store, and that merchandise is purchased at the best price point as possible. Holding too much inventory on hand generate costs like carrying costs. Whereas having too little inventory on hand makes customers dissatisfied and it leads to declining