The ABCs of Accounting: The Story of Inventory

Keeping track of inventory is a crucial yet challenging process—and the more raw materials, components, and products a company has, the more challenging it gets. This program explores key aspects of managing inventory while keeping an eye on how inventory figures impact a company’s bottom line.

First, the physical counting process is illustrated, including special situations such as figuring out who owns merchandise in transit or on consignment. Second, average cost, FIFO, and LIFO costing methods are analyzed. Third, periodic and perpetual systems of valuation are contrasted with three methods used in special situations: the lower-of-cost-or-market method, net realizable value, and estimating. Fourth and finally, the impact of inventory errors on financial statements is addressed.

1. Accuracy of Inventory Inventory includes the items currently available for sale or in the process of becoming available for sale. Inventory represents the material assets on financial statements.

2. Principals of Inventory Principals of inventory include physical count; auditing high cost items; freight agreement for merchandise in transit; and valuation of consigned goods.

3. Cost Methods of Inventory FIFO, the most common costing method, states inventory at current price. LIFO allows for lower inventory balance. Average cost method is the average product cost over a certain period.

4. Inventory Systems Periodic inventory system is taken at various times during the year, only recording revenue at time of sale. Perpetual inventory uses computers to track and record both revenue and cost of goods.

5. Other Methods of Inventory Valuations LOCOMM reports inventory at lowest cost. Net Realizable Value is for outdated or damaged inventory. Estimation Method is used when it is impractical or impossible to do inventory.

6. Inventory Transactions Cost of merchandise on hand and cost of merchandise sold during an accounting cycle both go on balance sheet. Inventory transactions affect both the balance sheet and income statements.

Grade: 9-12

The ABCs of Accounting: The Story of Inventory (DVD)
© 2002
Time: 15 Minutes