phantom inventory

(noun)

Phantom inventory is a common expression for goods that an inventory accounting system considers to be on-hand at a storage location, but are not actually available. This could be due to the items being moved without recording the change in the inventory accounting system, breakage, theft data entry errors or deliberate fraud. The resulting discrepancy between the online inventory balance and physical availability can delay automated reordering and lead to out-of-stock incidents. If not addressed, phantom inventory can also result in broader accounting issues and restatements.

Examples of phantom inventory in the following topics:

  • 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.

  • Impact of Measurement Error

    • Inventory systems can be vulnerable to errors due to overstatements (phantom inventory) when the actual inventory is lower than the measurement or understatements (missing inventory) when the actual stocks are higher than the measurement.
    • Overstatements and understatements can occur as a result of theft, breakage, scanning errors or untracked inventory movements.
    • Inventory controlling helps revenue and expenses be recognized.
    • A general rule is that overstatements of ending inventory cause overstatements of income, while understatements of ending inventory cause understatements of income.
    • Female clerk doing inventory work using a handheld computer in a Tesco Lotus supermarket in Sakon Nakhon, Thailand

  • Phantom Limb Sensation

    • Phantom limb sensations include pain, itches, twitching, and feelings of gesturing.
    • Phantom sensations may also occur after the removal of body parts other than the limbs, such as after the amputation of the breast, the extraction of a tooth (phantom tooth pain), the removal of an organ (such as the appendix), or the removal of an eye (phantom eye syndrome).
    • Phantom limb pain is usually intermittent.
    • Instead, the patients' phantom pains increased.
    • Many were left with the sensation of both the original phantom limb, as well as a new phantom stump with a pain of its own.

  • Reporting Inventories

    • Companies must choose a method to track inventory.
    • The perpetual inventory system requires accounting records to show the amount of inventory on hand at all times.
    • In the periodic inventory system, sales are recorded as they occur but the inventory is not updated.
    • Regardless of what inventory accounting system is used, it is good practice to perform a physical inventory at least once a year.
    • Inventory itself is not an income statement account.

  • Dangers Involved in Inventory Management

    • Excessive inventory means idle funds which earn no profits; inadequate inventory means lost sales.
    • The scope of inventory management also concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns, and defective goods and demand forecasting.
    • However, it is not well advised for the firm to keep low inventory levels, since inadequate inventory means the firm does not have sufficient raw materials for production.
    • Inadequate inventory also means not ample goods to sell.
    • Inflation encourages the firm to purchase more inventory, exposing them to excessive inventory.

  • Conducting a Physical Inventory

    • Physical inventory is a process where a business physically counts its entire inventory.
    • In addition, inventory control system software can speed the physical inventory process .
    • A perpetual inventory system tracks the receipt and use of inventory, and calculates the quantity on hand.
    • The teams count the inventory items and record the results on an inventory-listing sheet.
    • An inventory control system ensures that the company's books reflect the actual inventory on hand.

  • 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.

  • Inventory Management

    • In the context of accounting, inventory or stock is considered an asset.
    • Inventory management tracks the shape and percentage of stocked goods.
    • Inventory management addresses a number of concerns, including: replenishment lead time; carrying costs of inventory; asset management; inventory forecasting; inventory valuation; inventory visibility; future inventory price forecasting; physical inventory; available physical space for inventory; quality management; replenishment; returns and defective goods; and demand forecasting.
    • Reasons for keeping an inventory include:
    • Inventory considerations present at each level include:

  • Benefits of Inventory Management

    • The intent of inventory management is to continuously hold optimal inventory levels.
    • The scope of inventory management concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods, and demand forecasting.
    • Inventory management involves systems and processes that identify inventory requirements, set targets, provide replenishment techniques, report actual and projected inventory status, and handle all functions related to the tracking and management of material.
    • Inventory management also can help companies improve cash flows.
    • Companies with effective inventory management do not have to spend large capital balances for purchasing enormous amounts of inventory at once.

  • Methods in Retail Inventory

    • For some companies, taking a physical inventory is impossible or impractical so the Retail Inventory Method is used to estimate.
    • Note that both the gross margin and the retail inventory methods can help you detect inventory shortages.
    • The advantage of this method is that companies can estimate ending inventory (at cost) without taking a physical inventory.
    • Because RIM only provides an approximation of inventory value, physical inventory must also be performed periodically to ensure the accuracy of inventory estimates due to issues such as shoplifting.
    • The steps for finding the ending inventory by the retail inventory method are: