Inventory- Type, Costing Method, NRV Test, Stock Count 

Inventory is a raw material used to produce goods that are available for sale and generating profit. Inventory is the major assets of a company because the turnover of inventory represents the main source of profit generate and the income for the company’s shareholders.  

Types of Inventory

The three types of inventory includes raw materials, work-in-progress, and finished goods. They are grouped as a current asset on a company’s balance sheet.

 Raw Materials

Raw materials are the component parts or the resources that used to make or produce the final goods. Example of raw material includes grain, oil, metal, wood, and plastic. For example, flour, yeast, sugar and salt are the raw material used in a bread manufacturing to produce bread.

Work-In-Progress

Work In Progress is the goods that manufactured in halfway which not yet complete or waiting for completion. One of the examples of work in progress is manufactured goods such as a wardrobe that need to assemble which incur the labour cost to finish the product. In a nutshell, the work in progress category includes all items that have been processed, but not yet sold.

Finished Goods

Finished products are items that are completed and ready to transfer to the market for sale. They have gone through all steps of manufacture as well as quality control. As a result, for the bread factory, the finished goods are the finishing packets of bread that are dispatched to the market for sale after passing quality inspections.

Costing Method of Inventory

Modern organisations employ one of three basic inventory costing strategies. The industry will determine which of the ones to be employed is best for them to operate. Whichever approach they adopt, it must be maintained year after year. Three ways are as follows:

  • First-in, first-out (FIFO)
  • Last-in, first-out (LIFO)
  • Weighted-average  

First-In, First Out (FIFO)

First-in, first-out (FIFO) inventory valuation is based on the cost flow hypothesis that the primary things acquired are also the primary products sold. In most businesses, this hypothesis closely embodies the practical flow of products, making it the most conceptually accurate form of inventory valuation. The FIFO flow concept is a rational one for a firm to adopt, as it reduces the risk of inventory obsolescence by prioritising to sell off the earliest products.

Last-In, First-Out (LIFO)

Last-in, first-out (LIFO) is an inventory accounting approach which registers the most lately manufactured products to be prioritised to sell. Under LIFO, the most recent things acquired (or created) are the primary to be expensed as cost of goods sold (COGS), suggesting that the lower cost of earlier products will be represented as inventory.

Weighted-average

Weighted-average is a way for calculating the amount that transfers into cost of goods sold (COGS) and inventory using a weighted-average. This approach includes dividing the cost of items offered by the number of units available.

NRV Test of Inventory

Net realisable value is the projected sale price of items less the cost of sale or disposal. It is needed to determine the lower of cost or market for on-hand inventory products. Deductions from the projected sale price are any reasonably expected expenses of finishing, carriage, and disposing of merchandise. 

Net realisable value is a critical statistic in inventory accounting under Generally Accepted Accounting Principles (GAAP) and International Financing Reporting Standards (IFRS) (IFRS). The measurement of NRV is crucial as it avoids asset valuation from being overstated. 

Net realisable value is an essential measure helped in the lower cost or market method of accounting reporting. Under the market method reporting methodology, the company's inventory needs to be recorded on the balance sheet at a lower value than either the historical cost or the market value. If the market value of the inventory is uncertain, the net realisable value can be helped to approximate the market price. 

Stock Count of Inventory 

The inventory count (known as stocktaking) is the physical verification of quantities in an inventory or warehouse, as well as their condition. The company can determine both its assets and its obligations by doing an annual inventory count. All the company's assets (as well as all its liabilities) should be listed. The goal of this technique is to figure out how much inventory there is in the company.

Traders and business owners should utilize a merchandise management system to determine what is in their warehouses on a regular basis. An inventory count allows a business to know exactly what goods and assets it has and where to find them fast. It also helps to check if the availability of the inventory is accurate. It's not unusual for the actual inventory to not correspond to the book balances.

Inventory count is one of the most important steps in a business. It is a process that is crucial to ensure the company can supply its customers with sufficient inventory whenever they require. It involves inspecting each item for quality and quantity, ensuring the company to have what it needs to be on hand. 


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GETTING DOWN TO BUSINESS

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