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Published -
- August 2, 2019
- 6:44 pm
Learn all about inventory systems and inventory costing methods in just a few minutes!
Fabio Ambrosio, CPA, instructor of accounting at the Central Washington University, explains perpetual inventory systems, periodic inventory systems, and the first in, first out (FIFO), last in, first out (LIFO) and weight average methods of valuing inventory.This video is part of a complete, condensed Principles of Accounting series presented in short, dige
Course Hero’s Principles of Accounting video series covers the essentials of introductory accounting. Our short digest covers everything you need to know about the accounting cycle, accounting systems and controls, accounting for receivables and long-term assets, accounting for liabilities and equities, entity organizations and business analysis.
The video series begins with an introduction to Generally Accepted Accounting Principles (GAAP) and an exploration of accounting systems. It continues with an exploration of journalizing, trial balances, and the adjusting process that leads to the creation of the four major financial statements companies produce: income statement, statement of owner’s equity, balance sheet and statement of cash flows.
Along the way, you’ll learn about:
• GAAP and other legal requirements for accounting and reporting
• The Accounting Equation
• Single-Step and Multiple-Step Financial Statements
• Double-Entry and Manual Accounting Systems
• The General Ledger and Chart of Accountings
• Trial balances and the adjusting process
• Ethical standards in accounting
The series continues by providing a deeper understanding of how entities employ accounting principles, including:
• Accounting for merchandising businesses, including inventory costing methods and systems
• Internal and cash controls
• Accounting for receivables and long-term assets
• Accounting for current liabilities and payroll, long-term liabilities and investments
• Categories of businesses and the four types of business entities
• Corporate annual reports
Finally, the Principles of Accounting crash course includes a primer on business analysis tools, including preparation of a statement of cash flows and the uses ratio analysis.
What is an inventory system and why is it important for businesses?
Inventory is an essential component of any business that deals with buying and selling products. It refers to the stock of goods that a company holds to meet the future demands of its customers. Efficient inventory management is crucial for the success of any organization as it ensures smooth production, timely delivery, and customer satisfaction. To achieve this, businesses must use appropriate inventory systems and inventory costing methods.
Inventory Systems
Inventory systems are tools used to track the flow of goods in and out of a company. They help businesses determine their inventory levels, reorder points, and sales patterns. There are typically two types of inventory systems: periodic and perpetual.
Periodic inventory systems involve manually counting the stock at predetermined intervals, typically at the end of each accounting cycle. This method is time-consuming and prone to errors, but it is suitable for smaller businesses that have low inventory volumes.
Perpetual inventory systems, on the other hand, involve tracking inventory levels in real-time using software or hardware tools. It enables businesses to have an accurate and up-to-date view of their inventory levels at any given time. It’s a more efficient method for larger businesses or those with higher inventory volumes.
Inventory Costing Methods
Inventory costing methods allow businesses to allocate inventory costs to the products sold. The three primary inventory costing methods are First-In, First-Out (FIFO), Last-In, First-Out (LIFO), and Weighted Average Cost (WAC).
FIFO method assumes that the first items purchased are the first ones sold. LIFO method assumes that the last items purchased are the first items sold. The weighted average cost method considers both the cost of goods sold and the remaining inventory at the end of the period while calculating the cost of inventory.
The inventory costing method chosen can impact the financial statements and tax liabilities of a business. Therefore, businesses should choose the method that aligns with their financial goals and complies with tax regulations.
Principles of Accounting
Accounting principles dictate how businesses perform their accounting activities. These principles ensure that businesses maintain consistency, accuracy, and transparency in their financial reporting. There are several accounting principles that businesses adhere to, such as the matching principle, the revenue recognition principle, and the cost principle, and many more.
The matching principle is crucial when dealing with inventory accounting as it dictates that the costs associated with the sale of inventory should be recorded in the same period as the revenue generated from its sale. Therefore, businesses must choose an inventory costing method that aligns with the matching principle.
Conclusion
Inventory management plays a crucial role in the success of any business. Efficient inventory systems and inventory costing methods help businesses optimize their inventory levels to meet their customer demands and financial goals. Additionally, adhering to accounting principles ensures accurate and transparent financial reporting, which is critical for the long-term success of a business.
