Week 4: Inventory Management Discussion
Inventory Management (graded)
A review of the balance sheet of a retailer, such as Wal-Mart, will disclose that in current assets the majority
investment is in inventory. With manufacturers, such as Ford, the inventory is spread between three different
categories. Let's start our discussion with some basic inventory questions. How is inventory valued? Which
inventory valuation method is most popular and why? What impact on the financial reports can the selection of
an inventory valuation method have?
Responses
Response
Inventory
Management
Author
Dimitra Arrieta
Date/Time
9/24/2012 9:55:00 PM
A business that buys goods and resells them to customers is called a merchandiser. Inventory is a
current asset account that represents goods purchased that are available for resale to customers. For a
merchandiser, inventory is a large and very valuable asset. Think of the cash that a company like
Walmart has in its inventory. Recording transactions and tracking inventory are important parts of the
financial information for this type of company.
When inventory is purchased it is recorded as an asset, since it is something owned and has future
value. The balance in the inventory account is shown on the balance sheet. When inventory is sold, it is
removed from the asset account and recorded as "cost of goods sold," a type of expense account. The
amount of cost of goods sold for the period is listed on the income statement, where it is subtracted
from sales (revenues).
Sales are recorded at the selling price, whereas; inventory and cost of goods sold are recorded at the
cost of purchasing the goods from the manufacturer. The difference between the sale (revenue) and the
cost is gross profit.
Sales minus cost of goods sold equal gross profit. Gross profit is often evaluated as ratio to sales,
referred to as the gross profit percentage. Although dollar values may vary, the ratio between sales, cost
of goods sold, and gross profit should be relatively stable. This ratio is watched closely by
management, since changes can rapidly reduce profits significantly.
In a merchandiser's income statement, other expenses are subtracted from gross profit to determine net
income. This format for the income statement provides more useful information to management and
other users of the financial statements.
RE: Inventory
Management Diangelo Miller
Modified:9/26/2012 8:37 AM
9/26/2012 8:31:39 AM
I believe inventory is valued as a great asset and the perpetual system is a inventory
control system to keep track of the inventory. the impact on the financial record will
be greater in the assets department. I FIFO is the most popular because it give the
company a correct count of inventory.
RE:
Inventory
Dimitra Arrieta
Management
9/27/2012 6:36:13 PM
I definately agree with you about the FIFO being the most popular because it
does give the company a correct count of inventory as discussed in todays
class.
RE:
Inventory
Professor Thomas
Management
9/30/2012 8:17:25 AM
Hi Dimitra (or class),
All methods give the correct count of inventory on hand. However,
each just assigns costs in a different manner.
Which method do you believe gives the most inaccurate cost
assignment for an company such as a grocery store? For example, do
you think LIFO would be the most accurate or inaccurate cost
method for fruit sold by a grocery store?
RE:
Inventory
Bruce Burbank
Management
10/2/2012 12:16:43
PM
For a automotive company selling cars a LIFO inventory
would present the most inaccurate cost. Car dealers require
moving inventory in and out quickly, so having a vehicle
in inventory too long has a negative effect on profit, because
vehicles depreciate rapidly and will not be the most effective
for a car dealership. So it makes more sense for car dealers
to inventory cars in a FIFO systems to reduce potential lost.
RE:
Inventory
Marvalyn Richards
Management
10/2/2012 6:26:15
PM
Modified:10/2/2012 6:28 PM
I believe we discussed that in class as being the most inaccurate
method, and afterall it does seems so since the inventory for the
lower price is basically still lying there, while the more expensive
ones are being sold for the bigger price.
RE:
Inventory
Edward Steward
Management
10/2/2012 9:04:21
AM
I agree FIFO being the most popular but in a company like
Wal-Mart, I would think they use both methods FIFO &
LIFO, simply because of the products they carry. I would
think in a grocery store that the most inaccurate method
would be LIFO, the chances of losing product is too great.
Shelf life comes into play,with LIFO, too many products
from early inventory just sits there to outdated and can not
be sold.
RE: Inventory
Management Quintavious Mapp
9/27/2012 5:56:15 PM
Modified:9/29/2012 11:14 PM
Average cost is the most popular because its cheaper and faster. Accuracy is shown
on the numbers generated to determine what is cost and revenue. Inventory is valued
using either LIFO, FIFO, average cost, or specific unit.
RE:
Inventory
Diangelo Miller
Management
9/29/2012 6:03:01 PM
Perpetual is great just more expensive I believe if I am wrong correct me but I
think this system is used big business.
RE:
Inventory
Quintavious Mapp
Management
9/29/2012 11:17:20 PM
FIFO is most expensive and big businesses that have the money
should use it.
RE:
Inventory
Professor Thomas
Management
9/30/2012 8:10:33
AM
Hi Quintavious,
Why do you believe that FIFO is the most expensive
method?
RE:
Inventory
Quintavious Mapp
Management
10/1/2012 12:00:08
AM
Because the amount of time and effort to calculate
the numbers.
RE:
Inventory
Professor Thomas
Management
10/2/2012 6:53:40
PM
Hi Quintavious (or class),
Any thoughts on why more time and effort
would be spent to calculate the numbers for
FIFO versus LIFO or other methods?
RE:
Inventory
Dimitra Arrieta
Management
10/2/2012
8:31:20 PM
Retail Costing, FIFO, LIFO, Average
COST?
Retailers need to control their costs with an iron fist,
since cost of inventory is often one of, if not the,
largest cost of doing business. It is also one of the
things that a retailer can control by working with
vendors, as opposed to rent and utilities, which are
essentially fixed costs.
There are various methods for calculating inventory
cost, but the most common are "First In First Out"
or FIFO, "Last In First Out" or LIFO, and Average
Cost.
To determine which one is appropriate for your
business you need to understand the following
things:
-Frequency of price changes from your vendors
-Granularity of data, can you track cost by
individual item unit?
-Ability of the POS system to handle serial numbers
and other identifiers
-Cost of the effort involved in tracking costs by
item.
In reality FIFO and LIFO are similar, and typically
apply to items that can be tracked by serial number
or other unique identifier. If you receive 20 items a
week, and they are identical outside of a mid-week
cost change, it may be impractical or impossible to
use FIFO and LIFO.
For this reason, most retailers use Average Costing.
This works because overtime any changes in cost
versus retail price even out due to the total volume
of sales.
Stated another way, it's not important to know the
cost of "this particular widget" as long as you know
that you sold 20 widgets and the average cost was
"$X.XX" Once the cost increases beyond a certain
threshold, you need to increase your retail price to
protect your margins.
Average costing is also the easiest to maintain and
can be handled on the fly, saving you time and
effort in tracking your inventory, while still giving
you good data.
FIFO and LIFO certainly have their places, but for
the average small retailer, Average Cost is a time
saver that is easily managed with a good POS.
http://www.evancarmichael.com/Retail/3790/RetailCosting-FIFO-LIFO-Average-COST.html
RE:
Quintavious Mapp
10/2/2012
Inventory
Management
9:31:09 PM
Great explanation
Dimitra. The professor
explained the same thing
in class in with us and
that's how we know.
Inventory
Management
Bruce Burbank
9/30/2012 4:23:28 PM
Inventory is valued as the cost of goods sold and listed as a asset on the balance sheet
until sold. The most popular inventory method is perpetual, because the system
achieves on the go control over goods. Owners are able to see real time movement of
inventory and can adjust orders as necessary to accommodate customers. The impact
this method has on financial reports is the cost to up-keep this system, owners have to
keep support staff available to fix outages, which could be costly, depending on the
type of business you're in.
RE:
Inventory
Diangelo Miller
Management
9/30/2012 11:39:00 PM
Yea I believe that also especially like car sales men they sell cars at high
prices so the can really afford maintenance crews to keep the car in good
shape.
Inventory
Management
Amirah Howard
10/1/2012 8:41:10 AM
Inventory is valued like cash, so it brings money to the company in the future. I would
choose perpetual system over periodic system because it records each business
transaction when dealing with the inventory. You can see how and when inventory is
affected good or bad. I think it will affect the balance sheet at the end.
RE:
Inventory
Professor Thomas
Management
10/2/2012 6:55:36 PM
Hi Amirah,
If we are looking at the costing methods (LIFO, FIFO, average cost, etc.),
which one would you choose?
RE:
Inventory
Amirah Howard
Management
10/2/2012 8:01:12 PM
LIFO one because it could benefit more.
RE:
Inventory
Bruce Burbank
Management
10/1/2012 10:15:17 AM
Amirah,
I see your point, but depending on the size and kind of business your in will
dictate the type of inventory system you commit too. If you run a small store
front a perpetual system may not be necessary because it's not cost effective,
but if you are running a large retail store, perpetual may be the only way to
go.
RE:
Inventory
Amirah Howard
Management
10/1/2012 6:54:50 PM
Ok so if I really don't need this format for a small business I would
use the other one.
RE:
Inventory
Edward Steward
Management
10/3/2012 10:43:08
AM
Ok maybe I'm looking at this all wrong I'm not sure but
perpetual system,, is that the system, LIFO & FIFO are
methods within the system. So I would think that whether
your a large or small business, what ever system you use,
you can still use either method. Plus with LIFO, I believe
only benefits you in the with taxes and in the end, with a
little bit of profit. I might be wrong.
RE:
Marvalyn Richards
10/3/2012 9:07:50 PM
Inventory
Management
I would also prefer to use the perpetual system also, in that with each transaction the
inventory is updated. The only draw-back to that system is that it is costly and that
only large successful businesses can afford it.
Inventory
Management
Marvalyn Richards
10/1/2012 8:22:33 PM
Inventory is or should be valued from the price it was bought at. In large businesses the
perpetual system is most popular since it gives an immediate inventory update. The selection of
an inventory valuation method will impact the financial report since you have to decide on
whether it is first in last out, or last in first out and not the true amount that the item was bought
for. I have been thinking, if everything carried a different bar code, wouldn't tracking be
precise. For example, at Macy's every size small carries the same barcode' likewise mediums
etc. If an independent bar code could be assigned to each item inventory management should be
easier.
Inventory
Management
Edward Steward
10/2/2012 9:11:58 AM
How is inventory valued? Inventory should be valued at what you paid for it and the
market value (what it's worth). Also, the value of the inventory determines costs
of sales and profit.