6.01 What is Merchandise Inventory?
Understand Inventory Control MethodsPowerPoint #1
MerchandiseorStockoffered for sale by retail, wholesale, and distribution businessesMerchandise 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.
To be successful, businesses must control the size and variety of the inventories.Businesses need to know:The amount of merchandise on handThe cost of that merchandiseWhich items are selling and which are notA business should be able to maintain inventory sufficient to satisfy customers’ needs.
Managing and Controlling Inventory
Havingtoo much inventorycan cause:Cashflow problems if it is not sold quicklyStorageproblemsMerchandiseto become obsoletebefore it gets soldHaving too little inventory can cause:Customers to go elsewhere to have enough variety and choice
Managing and ControllingInventory (cont’d)
Inventory is recorded on the Balance Sheet as a Current Asset.Inventory also appears on the IncomeStatement 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.
Classification of Inventory
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 PointFree on Board (FOB) Destination
Goods In Transit
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) Shipping Point
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.
Free on Board (FOB) Destination
Goods that have been given to a business to sell, but that do not belong to the businessThese 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.
Goods On Consignment
What is Inventory?Explain why Inventory is often the largest asset of a company.Explain why inventories need to be properly managedand controlled.What are some problems with having too little inventory?What are some problems with having too much inventory?What doesIn Transitmean?Which type of FOB requires a company to record the cost of In Transit Goods?What are Goods on Consignment?
Questions for Understanding/Discussion