Financial Accounting

Topic:Inventory Accounting

Presented to- Arunkumar Thanvi
Presented byShanu Singh Sapana Singh Akshi Chandyoke Neha Churi Trupti pimple Swati shaw

10048 10047 10013 10037 10034 10043

What is inventory accounting? 

Inventory accounting is the process of keeping track of movements of stock in and out of a company. It covers both the logistics of stock management and the related financial accounting. Inventory accounting simply means keeping records of how much stock a company has and its total value. It can be more complicated as most companies have multiple product lines in multiple warehouses .

Why Is Inventory Important? 

Inventory is the physical assets of a company that is intended for sale or for the manufacture of products for sale. Inventory is constantly changing as quantities are sold and replenished. A company·s inventory is important on financial statements because it represents a large amount of the company·s assets. That value is determined by which accounting method the company uses.

What is Inventory Control? 

Inventory consists of the goods and materials that a retail business holds for sale or a manufacturer keeps in raw materials for production. Inventory control is a means for maintaining the right level of supply and reducing loss to goods or materials before they become a finished product or are sold to the consumer.ssss

Uncertainty in Demand  Inventory Costs  Safety Stock  Ordering Costs  The Cost of Shortfalls  Inventory Counts  Cyclical Counting  Flow Management  Special Concerns for Retail 

The Rules for Inventory Accounting  


Accounting provides business owners with several options related to inventory management. Inventory accounting may differ, depending on the type and number of inventory items sold by the company. Manufacturing and production companies can also have a different accounting process since they have raw materials and partially completed goods in their business. A few different rules exist for inventory accounting. Method Valuation Adjustments Physical Counts

Methods of Inventory Accounting 

Average cost method FIFO Method LIFO Method Specific Identification Method

Inventory Systems
There are two systems for accounting these methods they are: The periodic inventory system requires an audit of inventory at the end of the accounting period in order to adjust the inventory amounts to the correct remaining balance.  The perpetual inventory system accounts for the inventory as it leaves your stock so that you are always aware of how much inventory is available. The perpetual inventory system also requires an inventory audit at the end of the accounting period in order to ensure that all transactions are properly recorded.

Average cost method

A method of determining the value of an inventory by calculating unit cost The average costing method divides the total cost of all materials of a particular class by the number of units on hand to find the average price. Average cost method is divided into two: weighted average and moving average.

FIFO Method
FIFO stands for first-in, first-out.  This means is that the first item that comes into a warehouse (and the oldest) will be the first item shipped out.  FIFO is a better accounting method to use in times when the economy has stable prices.  Companies generally ship the oldest stock in inventory to prevent the items from deteriorating or expiring (such as with perishable goods). 

LIFO Method 

LIFO stands for last-in, first-out. Company records its inventory as the last items that were purchased are the first items sold . This method is also sometimes referred to as FILO (first-in, lastout). On paper this will show a decrease in profits but it also helps to reduce taxes because a company is not recording a false profit (which is the case with FIFO) LIFO is a better approach to matching current costs with current revenues. The drawback to LIFO is that it must also be used on financial statements and reports. This means that companies will show less net profit than if they used FIFO.


Inventory pricing also becomes complicated when unit prices for inventory items fluctuate during an accounting period. Nevertheless the basic idea of inventory pricing is uncomplicated: a retailer should determine the value of its inventory by figuring out what it cost to acquire that inventory. When an inventory item is sold, the inventory account should be reduced (credited) and cost of goods sold should be increased (debited) for the amount paid for each inventory item. This method works if a company is operating under the Specific Identification Method.


Under the Specific Identification Method, the retailer would have to mark or code every pair of jeans, to determine which purchase a particular pair of jeans came from. This method works well when the amount of inventory a company has is limited, the value of its inventory items is high, and each inventory item is relatively unique This method is far too cumbersome for companies with large and even medium-sized inventories, although it is the most precise way of determining inventory prices. As a result, other inventory valuation methods have been developed.

Choosing the appropriate methodology is a difficult task as there are many unknown variables that go into the decision, such as inflation or shelf life. With high inflation, or in markets with prices increasing, companies will achieve a higher profits by matching sales against inventory which was produced at lower prices; earnings per share will increase but so will tax liability due to an increase in profits. Using LIFO on the other hand will produce the opposite effect. In essence, you will be matching new sales against higher production costs, thereby lowering net income and EPS. Some companies may actually prefer this to keep their tax liability down. Companies cannot use different methodologies when reporting to the government and their shareholders so choosing either one may be a gift or a curse. Also remember, when analyzing inventory valuations, it is important to compare one company against another company in the same industry

Sign up to vote on this title
UsefulNot useful