Inventory Management

Answer questions regarding inventory management.

Introduction

Inventories are the least liquid form of any assets. In other words, they cannot be converted into cash easily. Inventories can be in the form of raw material, goods under process, or finished goods, but unless the finished goods are sold, cash is tied up into inventories. Similarly, if the raw material is not converted into final goods, then cash is blocked in raw material. Therefore, managing inventories and supply chains is very important for merchandising businesses.

Have you ever taken advantage of a preinventory sale at your favorite retail store? Many stores offer bargain prices to reduce the merchandise on hand and to minimize the time and expense of taking the inventory. A smaller inventory also enhances the probability of taking an accurate inventory since the store has less merchandise to count.

From your studies you know that companies use inventory amounts to determine the cost of goods sold. This major expense affects a merchandising company’s net income. Now, you examine the importance and role of inventories in preparing an accurate income statement and balance sheet. Your work will also stress the importance of having accurate inventory figures and the serious consequences of using inaccurate inventory figures. After more study, you should understand how taking inventory connects with the cost of goods sold figure on the store’s income statement, the retained earnings amount on the statement of retained earnings, and both the inventory figure and the retained earnings amount on the store’s balance sheet.

Overview

This assessment focuses on cost flow assumptions and inventory valuation. It requires an understanding of:

• The value of proper merchandise inventory valuation for an organization’s financials.
• The concept of the physical flow of goods.
• The most commonly used inventory valuation methods.
• How to use alternative historical cost methods for valuing merchandise inventory.
• How to use the inventory turnover ratio as a tool for financial analysis.

Preparation

• Complete the Assessment 5 Template [DOCX].
• Review all of the suggested resources and readings.

Note: Accuracy in accounting is paramount so take your time and double-check your work for errors or omissions.

Instructions

Answer questions correctly. When you are satisfied with your responses, save and submit your template in the courseroom.

Step 1: Identify the costs to be included when calculating inventory cost.

Step 2: Explain the three methods of costing and which one will yield the highest tax net income where price level is declining.

Step 3: Describe alternative methods of calculating inventory cost.

Step 4: Calculate the inventory turnover for a company.

Step 5: Identify which methods to determine shrinkage or shortage in the physical inventory.

Competencies Measured

By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:

• Competency 1: Define accounting terminology and its application to accounting principles.
  • Identify the costs to be included when calculating inventory cost.
  • Explains the three methods of costing and which one will yield the highest tax net income where price level is declining.
  • Explain methods to determine shrinkage or shortage in the physical inventory.
• Competency 2: Apply accounting cycle strategies to manage business financial events.
  • Describe alternative methods of calculating inventory cost.
  • Calculate the inventory turnover for a company.
• Competency 4: Convey purpose, in an appropriate tone and style, incorporating supporting evidence and adhering to organizational, professional, and scholarly writing standards.
  • Convey clear meaning through appropriate word choice and usage.