6.01 What is Merchandise

Inventory?Understand Inventory Control Methods

PowerPoint #1

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.

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

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

Managing and Controlling Inventory (cont’d)

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.

Classification of Inventory

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

Goods In Transit

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) Shipping Point

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.

Free on Board (FOB) Destination

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.

Goods On Consignment

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?

Questions for Understanding/Discussion