In: Accounting
1. If you were starting up a business would you consider selling your inventory on consignment? Why or why not?
2. Why should there be different types of inventory cost formulas? Wouldn’t it be easier if all companies followed the same method?
3. If inventory errors offset in future periods, would it still be necessary to adjust inventory if you know about the errors?
Answer :
1. Selling goods on consignment is described as a situation whereby
goods are shipped to a dealer who pays you, the consignor, only for
the merchandise which sells. The dealer, referred to as the
consignee, has the right to return the merchandise which does not
sell and have no obligation of its own. basically the Dealer have
no Risk and Consignor can merchandise its product to various
places
As far as New start-ups business is concerned it totally depends
upon the type of Business and nature of inventory. But still one
can take decision about selling inventory on consignment basis on
the basis of following grounds.
Here are some of the points which are inr favour
of selling inventory on consignment basis
a. You must have enough availability of cash in hand to run day to
day expenses because in case of consignment , the consignee never
invest , he will only pay for inventory , if it is actually
sold.
b. It provides the manufacturer with the opportunity to have the
merchandise exposed to the buying market, instead of having it
stored and isolated in a warehouse while waiting for an order from
a buyer.
c. In case of newly designed and manufactured product for which
there is no sale record till now Dealers might be more enthusiastic
as there is zero investment of there own.
d. Consignor can encourage wholesalers and retailers to stock
seasonal or otherwise newly introduced merchandise which they might
not usually buy because of lack of demand.
Comment : it is advisable to sell inventory on Consignment basis ,
if possible as it increases the value and market area of product
keeping into consideration the factors related and suitability for
start up business.
2. There are 5 Inventory Valuation Methods
a. Retail Inventory
b. Specific identification method
c. First in first out (FIFO)
d. Last in First Out (LIFO)
e. Weighted average Method
Companies in United States operates under Generally accepted
accounting principles which recommend basically three most imp
Formulas for inventory valuation which are FIFO , LIFO and weighted
average
Each Method has its own specification and suitable for
specific kinds of entities and business units, this is the reason
that there are different Inventory Valuation techniques and methods
available.
For Example :
The FIFO (first-in, first-out) method of inventory costing assumes
that the costs of the first goods purchased are those charged to
cost of goods sold when the company actually sells goods.
The LIFO (last-in, first-out) method of inventory costing assumes
that the costs of the most recent purchases are the first costs
charged to cost of goods sold when the company actually sells the
goods.
The weighted-average method of inventory costing is a means of
costing ending inventory using a weighted-average unit cost.
Companies most often use the weighted-average method to determine a
cost for units that are basically the same.
It is clear from the above info that each method has different
techniques and provides different results
:- Companies apply method as per their suitability and type of business which reflects true and fair picture of that particular entity thus it would not be easier as well as recommended to use same inventory method for all the businesses.
3. If error Exists in Inventory valuation whether it overstates
or understates inventory it will impact the overall profits of
current year as well as of next year
If the error offsets in future still it would be highly recommended
to correct the error and adjust inventory accordingly for the
purpose of true and fair presentation of financial statements of
entity.