6.01 What is Merchandise Inventory?

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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?