Inventory Record Keeping Curriculum Georgia Department of Education Agricultural Education Written by Jimmy Scott Georgia Ag Ed Curriculum

1 Why Inventories Are Important? Owner Equity Statements – An inventory is needed to show an accurate account of the financial standing of the business at a specific point in time. An owner equity statement/balance sheet cannot be developed until the business inventory is complete. Income Statements – An inventory is a necessary component when calculating an income statement. Even if a business is using the cash accounting method, changes in inventory values should be included in the income statement. Obtaining Credit – Financial institutions generally require accurate inventories as a condition before they will grant credit. The inventoried assets may also be used as collateral to securer the loan.

2 Why Inventories Are Important? Insurance – Insurance companies require that accurate inventories are maintained as a basis for calculating premium costs and paying settlements in the event of damage or loss. Estate Planning – A complete and accurate inventory is one of the first steps in estate planning and is always necessary in estate settlement situations. Tax Management – Inventory management plays a key role in income tax management strategies, especially with cash accounting systems. Inventory control is also important in the areas of capital gains tax and property tax valuation.

3 What Should be Inventoried? All assets, to be sold during the accounting period, that are on hand at the time of the inventory. Examples are market livestock and crops in storage. Consumable supplies that are used in the normal production cycle. Examples are chemicals, fuel, replacement or repair parts, seed, feed, and fertilizer. Capital assets used by the business. Examples are animals used for breeding or replacement, machinery, equipment, tools, buildings, and, and improvements.

4 How To Determine Inventory Values? Cost – The value will be equal to the amount of cash, or its equivalent, paid to acquire the asset. Current Market Value – The value will be equal to the amount of cash, or its equivalent that could be obtained by selling the asset. Book Value – The value will be equal to the amount of cash, or its equivalent, paid to acquire an asset minus the accumulated depreciation.