Professional Documents
Culture Documents
Inventory Terminologies
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Product
Physical
counting
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Business Systems
Inventory Terminologies (cont.)
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Business Systems
Inventory Processes
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Inventory Processes
To illustrate, an inventory system handles the following functions:
1. Monitoring of stocks whether items are out-of-stock, below the
reorder point, or overstocked. If the items are out-of-stock or
below the reorder point, a Purchase Order (PO) should be
prepared requesting the needed materials.
2. Ordering of raw materials (for manufacturing) or goods (for
resale) from suppliers. Once the PO is finalized, the prepared
PO is then forwarded to the suppliers. A sequential and unique
PO number is generated to serve as reference for delivery later
on. The number of items to be reordered is based on the EOQ.
Note that the lead time is needed to compute for the EOQ.
3. Replenishment of quantity and updating of records of items once
orders are delivered to the company. A Delivery Receipt (DR) or
Receiving Slip from your supplier will be forwarded to your
company. This will be the basis on how much quantity will be
added to your current stocks-on-hand. In case the quantity
delivered is not complete, a backorder occurs.
4. Monitoring of Invoice for billing purposes. An invoice is defined
as document that contains the PO number as reference, names
and addresses of the buyer and the seller, the date and terms of
the sale, a description of the goods, the price of the goods, and
the mode of transportation used to ship the goods. The seller
calls the invoice a sales invoice; the buyer calls it a purchase
invoice.
[Inventory Processes, Page 7 of 20]
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Business Systems
Inventory Documents
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Inventory Documents
Several documents have been enumerated earlier. It would be just for
the students to see how each of them looks like and what the use for
each. The succeeding section enumerates all the important documents
used in an inventory processing.
1. Purchase Order - A formal request to a vendor to purchase
goods or services. This document may be sent in either
hardcopy or electronic format.
2. Receiving slip
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3. Invoice
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5. Stock Adjustment
6. Transfer order
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7. Re-order List
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Business Systems
Stock Card
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Stock Card
In current manual system, one important document that is used is the
Stock Card. The document is an individual record of every item in the
item master list. It shows the date when the goods came in; view the
movement on stock per item, location and period. The document
displays all the movement of items sold, purchased, returned,
assembled, and transferred.
First In, First-Out (FIFO) - This method assumes that the first
unit making its way into inventory is the first sold. For example,
let's say that a bakery produces 200 loaves of bread on Monday
at $1 each, and 200 more on Tuesday at $1.25 each. FIFO
states that if the bakery sold 200 loaves on Wednesday, the cost
of goods sold is $1 per loaf because that was the cost of each
the first loaves into inventory. The $1.25 loaves would be
allocated to ending inventory (appears on the balance sheet).
Example
A bakery produces 100 loaves of bread on Monday at Php18.00
each, and 100 more on Tuesday at Php22.00 each.
FIFO states that if the bakery sold 100 loaves on Wednesday,
the cost of goods sold is Php18.00 per loaf because that was the
cost of each the FIRST loaves into inventory.
The Php22.00 loaves would be allocated to ending inventory.
[Inventory Valuation Methods, Page 18 of 20]
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Inventory Valuation Methods
(cont.)
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Last In, First-Out (LIFO) - This method assumes that the last
unit making its way into inventory is sold first. The outdated
inventory is therefore left over at the end of the accounting
period. For the 200 loaves sold on Wednesday, the same bakery
company would allocate $1.25 to cost of goods sold while the
remaining $1 loaves would be used to calculate the value of
inventory at the end of the period.
Example
A bakery produces 200 loaves of bread on Monday at Php18.00
each, and 200 more on Tuesday at Php22.00 each.
LIFO states that if the bakery sold 200 loaves on Wednesday,
the cost of goods sold is Php22.00 per loaf because that was the
cost of each the LAST loaves into inventory.
The Php18.00 loaves would be used to calculate the value of
inventory at the end of the period.
[Inventory Valuation Methods (cont.), Page 19 of 20]
Inventory Valuation Methods
(cont.)
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The most important point in the examples above is that cost of goods
sold appears on the income statement, and ending inventory appears on
the balance sheet under current assets.
The reason why valuation is important in inventory is discussed in the
following section. If inflation is nonexistent, then all three of the inventory
valuation methods will produce the exact same results. When prices are
stable our bakery would be able to produce all of the loaves of bread at
$1, and FIFO, LIFO, and average cost would give us a cost of $1 per
loaf.
Unfortunately, the world is more complicated. Over the long term, prices
tend to rise, which means the accounting method can dramatically affect
valuation ratios.
If prices are rising, each of the accounting methods produce the
following results:
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