finished goods inventory

Examples of finished goods inventory in the following topics:

• Internal Controls

  • Inventory internal controls ensure that a company has sufficient resources to meet its customers' needs without having too much goods.
  • Internal controls over a company's inventory are meant to ensure that management has an accurate count of what materials and goods it has available for sale and to protect those goods from being spoiled, stolen or otherwise made unavailable for sale.
  • In short, inventory internal controls are meant to ensure that a company always has sufficient resources to produce and sell goods to meet its customers' needs without having oversupply.
  • As the material is processed into the goods for resale, the amount of raw material used should be deducted from the "raw material inventory" and the amount of goods that result from the process should be added to the "finished goods inventory. " As each finished item is sold, the "finished goods inventory" should be decreased by that amount.
  • Physical inventory counts are a way of ensuring that a company's inventory management system is accurate and as a check to make sure goods are not being lost or stolen.

• Categories of Goods Included in Inventory

  • Most manufacturing organizations usually divide their "goods for sale" inventory into raw materials, work in process, and finished goods.
  • Its finished good inventory consists of all the filled and labeled cans of food in its warehouse that it has manufactured and wishes to sell to food distributors (wholesalers), to grocery stores (retailers), and even perhaps to consumers through arrangements like factory stores and outlet centers.
  • Work in process or work in progress (WIP) - Materials and components that have began their transformation to finished goods.
  • This is not always included in the "goods for sale" inventory; that depends on the preference of the company.
  • Distinguish between the raw materials, work in process, finished goods and goods for resale

• Nature of Inventory

  • Inventory represents finished and unfinished goods which have not yet been sold by a company.
  • Inventory represents finished and unfinished goods which have not yet been sold by a company. .
  • Inventories are maintained as buffers to meet uncertainties in demand, supply, and movements of goods.
  • Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods.
  • Work in process, WIP - materials and components that have began their transformation to finished goods.

• Flow of Inventory Costs

  • Its finished goods inventory consists of all the filled and labeled cans of food in its warehouse that it has manufactured and wishes to sell to food distributors (wholesalers), to grocery stores (retailers), and even perhaps to consumers through arrangements like factory stores and outlet centers.
  • FIFO (+) Higher value of inventory (-) Lower cost of goods sold
  • LIFO (-) Lower value of inventory (+) Higher cost of goods sold
  • FIFO (-) Lower value of inventory (+) Higher cost of goods sold
  • LIFO (+) Higher value on inventory (-) Lower cost on goods sold

• Costing Methods Overview

  • Note that a manufacturing business's inventory will consist of work in process, or unfinished goods, and finished inventory; the costs of unfinished and finished inventory contain a combination of costs related to raw materials, labor, and overhead.
  • On the other hand, a retailer's inventory consists of all finished products purchased from a wholesaler or manufacturer; the costs of their units are based on their acquisition cost rather than the costs associated with manufacturing units.
  • The FIFO (first-in, first-out) method of inventory costing assumes that the costs of the first goods purchased are those charged to cost of goods sold when the company actually sells goods.
  • This method assumes the first goods purchased are the first goods sold.
  • The LIFO (last-in, first-out) method of inventory costing assumes that the costs of the most recent purchases are the first costs charged to cost of goods sold when the company actually sells the goods.

• Perpetual vs. Periodic Counting

  • Perpetual inventory updates the quantities continuously and periodic inventory updates the amount only at specific times, such as year end.
  • A company using the perpetual inventory system would have a book inventory that is exactly (within a small margin of error) the same as the physical (real) inventory.
  • Physical inventories are conducted at set time intervals; both cost of goods sold and the inventory are adjusted at the time of the physical inventory.
  • Perpetual inventory systems can still be vulnerable to errors due to overstatements (phantom inventory) or understatements (missing inventory) that occurs as a result of theft, breakage, scanning errors, or untracked inventory movements.
  • While the perpetual inventory method provides a close picture of the true inventory information, it is a good idea for companies using a perpetual inventory system to do a physical inventory periodically.

• Reporting Inventories

  • In a business accounting context, the word inventory is used to describe the goods and materials that a business holds for the ultimate purpose of resale.
  • A physical inventory must be taken at the end of the year to determine the cost of goods.
  • Regardless of what inventory accounting system is used, it is good practice to perform a physical inventory at least once a year.
  • However, the change in inventory is a component of in the calculation of cost of goods sold, which is reported on the income statement.
  • Depending on the format of the income statement it may show the calculation of Cost of Goods Sold as Beginning Inventory + Net Purchases = Goods Available – Ending Inventory.

• Methods in Retail Inventory

  • Total the beginning inventory and the net amount of goods purchased during the period at both cost and retail prices.
  • Divide the cost of goods available for sale by the retail price of the goods available for sale to find the cost/retail price ratio.
  • Deduct the retail sales from the retail price of the goods available for sale to determine ending inventory at retail.
  • To illustrate how you can determine inventory shortages using the retail method, assume that a physical inventory taken at year end, showed only $62,000 of retail-priced goods in the store.
  • Assume that use of the retail method for the fourth quarter showed that $66,000 of goods should be on hand, thus indicating a $4000 inventory shortage at retail.

• Efficiency Metrics

  • Efficiency ratios for inventory measure how effectively a business uses its inventory resources.
  • In addition, excess inventory increases the risk of losses due to price declines or inventory obsolescence.
  • Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory (to calculate average inventory, add the balances of beginning and ending inventory and divide by 2)
  • The inventory turnover ratio is a measure of the number of times inventory is sold or used in a time period, such as a year.
  • The inventory conversion ratio is a measure of the number of days in a year it takes to sell inventory or convert it into cash.

• Gross Profit Method

  • The gross profit (or gross margin) method uses the previous year's average gross profit margin (i.e. sales minus cost of goods sold divided by sales) to calculate the value of the inventory.
  • Calculate the cost of goods available for sale as the sum of the cost of beginning inventory and cost of net purchases.
  • Calculate the cost of ending inventory as the difference of cost of goods available for sale and estimated cost of goods sold.
  • Furniture Palace has cost of goods available for sale of $5000.
  • The gross profit (or gross margin) method uses the previous year's average gross profit margin (i.e. sales minus cost of goods sold divided by sales) to calculate the value of the inventory.