6.01 What is Merchandise Inventory? Understand Inventory Control Methods PowerPoint #1
Inventory • Merchandise or Stock offered for sale by retail, wholesale, and distribution businesses • Merchandise may also be made by a business for sale to customers. • It is the largest current asset of a business, and needs to be properly managed and controlled.
Managing and Controlling Inventory • To be successful, businesses must control the size and variety of the inventories. • Businesses need to know: • The amount of merchandise on hand • The cost of that merchandise • Which items are selling and which are not • A business should be able to maintain inventory sufficient to satisfy customers’ needs.
Managing and Controlling Inventory (cont’d) • Having too much inventory can cause: • Cash flow problems if it is not sold quickly • Storage problems • Merchandise to become obsolete before it gets sold • Having too little inventory can cause: • Customers to go elsewhere to have enough variety and choice
Classification of Inventory • Inventory is recorded on the Balance Sheet as a Current Asset. • Inventory also appears on the Income Statement in the Cost of Goods Sold Section. • When recording the purchase of inventory, include all costs necessary to purchase the item and get it to its intended location.
Goods In Transit • Goods in Transit are goods that have been purchased from suppliers, but have not yet been received. • Whether or not to include these amounts in inventory depends on who holds the title to the goods. • There are 2 main methods of shipping goods: • Free on Board (FOB) Shipping Point • Free on Board (FOB) Destination
Free on Board (FOB) Shipping Point • The buyer/business pays the transportation charges. • The title (ownership) for the goods passes to the buyer as soon as they are placed with the transportation company. • The costs of these goods must be included in the Inventory account.
Free on Board (FOB) Destination • The vendor/seller pays the transportation charges. • The title for the goods STAYS with the seller until the goods are delivered to the buyer/business. • The costs of these goods are NOT included in the Inventory account.
Goods On Consignment • Goods that have been given to a business to sell, but that do not belong to the business • These goods are NOT included in inventory. • The Consignee is the person or business receiving the goods. • The Consignor is the person or business that provides the goods to sell. • Often, the business holding the goods will indicate consignment goods in a note to the financial statements.
Questions for Understanding/Discussion • What is Inventory? • Explain why Inventory is often the largest asset of a company. • Explain why inventories need to be properly managed and controlled. • What are some problems with having too little inventory? • What are some problems with having too much inventory? • What does In Transit mean? • Which type of FOB requires a company to record the cost of In Transit Goods? • What are Goods on Consignment?