Financial Accounting

Topic:-
Inventory
Accounting
Presented to- Arunkumar
Thanvi

Presented by-
Shanu Singh 10048
Sapana Singh 10047
Akshi Chandyoke 10013
Neha Churi 10037
Trupti pimple 10034
Swati shaw 10043
What is inventory accounting?
 Inventory accounting is the process of keeping track
of movements of stock in and out of a company.
 It covers both the logistics of stock management and
the related financial accounting.
 Inventory accounting simply means keeping records
of how much stock a company has and its total value.
 It can be more complicated as most companies have
multiple product lines in multiple warehouses .
Why Is Inventory
Important?
 Inventory is the physical assets of a company that is
intended for sale or for the manufacture of products for
sale.
 Inventory is constantly changing as quantities are sold and
replenished.
 A company’s inventory is important on financial
statements because it represents a large amount of the
company’s assets.
 That value is determined by which accounting method the
company uses.
What is Inventory Control?
 Inventory consists of the goods and
materials that a retail business holds
for sale or a manufacturer keeps in raw
materials for production. Inventory
control is a means for maintaining the
right level of supply and reducing loss
to goods or materials before they
become a finished product or are sold
to the consumer.ssss
Continue…..

 Uncertainty in Demand
 Inventory Costs
 Safety Stock
 Ordering Costs
 The Cost of Shortfalls
 Inventory Counts
 Cyclical Counting
 Flow Management
 Special Concerns for Retail
The Rules for Inventory Accounting
 Accounting provides business owners with several options
related to inventory management. Inventory accounting
may differ, depending on the type and number of
inventory items sold by the company. Manufacturing and
production companies can also have a different
accounting process since they have raw materials and
partially completed goods in their business. A few
different rules exist for inventory accounting.
 Method
 Valuation
 Adjustments
 Physical Counts
Methods of Inventory Accounting

 Average cost method

 FIFO Method
 LIFO Method
 Specific Identification Method
Inventory Systems
There are two systems for accounting these methods they
are:-
 The periodic inventory system requires an audit of
inventory at the end of the accounting period in order
to adjust the inventory amounts to the correct
remaining balance.
 The perpetual inventory system accounts for the
inventory as it leaves your stock so that you are always
aware of how much inventory is available. The
perpetual inventory system also requires an inventory
audit at the end of the accounting period in order to
ensure that all transactions are properly recorded.
Average cost method
.
 A method of determining the value of an inventory by
calculating unit cost
 The average costing method divides the total cost of all
materials of a particular class by the number of units
on hand to find the average price.
 Average cost method is divided into two: weighted
average and moving average.
FIFO Method
 FIFO stands for first-in, first-out.
 This means is that the first item that comes into
a warehouse (and the oldest) will be the first
item shipped out.
 FIFO is a better accounting method to use in
times when the economy has stable prices.
 Companies generally ship the oldest stock in
inventory to prevent the items from
deteriorating or expiring (such as with
perishable goods).
LIFO Method
 LIFO stands for last-in, first-out.
 Company records its inventory as the last items that were
purchased are the first items sold .
 This method is also sometimes referred to as FILO (first-in, last-
out).
 On paper this will show a decrease in profits but it also helps to
reduce taxes because a company is not recording a false profit
(which is the case with FIFO)
 LIFO is a better approach to matching current costs with
current revenues.
 The drawback to LIFO is that it must also be used on financial
statements and reports. This means that companies will show
less net profit than if they used FIFO.
SPECIFIC IDENTIFICATION
METHOD
 Inventory pricing also becomes complicated when unit prices
for inventory items fluctuate during an accounting period.
 Nevertheless the basic idea of inventory pricing is
uncomplicated: a retailer should determine the value of its
inventory by figuring out what it cost to acquire that
inventory.
 When an inventory item is sold, the inventory account should
be reduced (credited) and cost of goods sold should be
increased (debited) for the amount paid for each inventory
item.
 This method works if a company is operating under the
Specific Identification Method.
Continue…

 Under the Specific Identification Method, the retailer would

have to mark or code every pair of jeans, to determine
which purchase a particular pair of jeans came from.
 This method works well when the amount of inventory a
company has is limited, the value of its inventory items is
high, and each inventory item is relatively unique
 This method is far too cumbersome for companies with
large and even medium-sized inventories, although it is the
most precise way of determining inventory prices. As a
result, other inventory valuation methods have been
developed.
Conclusion
Choosing the appropriate methodology is a difficult task as there are
many unknown variables that go into the decision, such as inflation
or shelf life.  With high inflation, or in markets with prices
increasing, companies will achieve a higher profits by matching
sales against inventory which was produced at lower prices;
earnings per share will increase but so will tax liability due to an
increase in profits.  Using LIFO on the other hand will produce the
opposite effect.  In essence, you will be matching new sales against
higher production costs, thereby lowering net income and EPS. 
Some companies may actually prefer this to keep their tax liability
down.  Companies cannot use different methodologies when
reporting to the government and their shareholders so choosing
either one may be a gift or a curse.  Also remember, when analyzing
inventory valuations, it is important to compare one company
against another company in the same industry