Question

"Inventory Management & Valuation"

All manufacturing, merchandising, and some service businesses carry inventory. These include retail stores, restaurants, construction companies, hospitals, and many others. Think of an industry that you work in, have worked in, or are interested in. Discuss the challenges of managing and valuing the inventory.

• How quickly does the inventory become obsolete?
• How does obsolescence impact valuation?
• How quickly does the inventory turnover?
• What happens if the turnover is too fast or too slow?

Answer 1

	Answer is as under :
	I have worked in FMCG sector. The challenges of managing and valuing the inventory and the risk associated are as under :
1	There is a risk that standard cost derived for a product by management is incorrect, which may lead to incorrect inventory valuation
2	Incorrect valuation of inventory by company because of incorrect rates used in valuation.
3	Management will ask the account department to Inaccurate / unauthorized write off of inventories without adequate supporting's / approval from the authorized personnel. The write off may be due to any of the following reasons: obsolete / damaged inventory , expired / near expiry inventory , slow moving / non moving inventory , any other reason for write off . To show higher profit or loss situation management will adopt this method
4	Physical inventory counts are not performed on a periodic basis, potentially resulting in inaccurate inventory records; and Shortages/Excesses noted on physical count are not recorded or recorded at the incorrect amount. This is result in loss of valuable inventory material as the risk of theft increases
5	1. Obsolete/ slow moving inventory exists but no provision is recorded for such inventory by management : 2. In evaluating the provision for obsolete/slow moving inventory: • Management’s process for evaluating is inappropriate. • The calculation contains significant assumptions that are inappropriate, lack sufficient basis, or lack sufficient support; and • The calculation is based on inaccurate inventory aging data; and • The provision for obsolete/slow moving inventory is recorded at the incorrect amount.
	How quickly does the inventory become obsolete?
	Inventory becomes obsolete with in a week time because in FMCG sector , inventory will have small self life
	How does obsolescence impact valuation?
	Obsolescence inventory reduced the inventory value because obsolescence inventory is reduced to net realizable value
	How quickly does the inventory turnover?
	Inventory turnover is very fast because in FMCG sector the goods with smaller shelf life needs to be used quickly or else it will result in loss
	What happens if the turnover is too fast or too slow?
	How low inventory turnover ratio affects the company
	Suppose COGS as on Jan 2019 is 385301 and Average inventory value is 44026
	Inventory turnover ratio = 385301/44026
	8.75 times
	the ideal inventory ratio is between 3 to 6
	Lower inventory ratio will lead to increase in warehouse storage space to Walmart, there is decrease in sales which might due to the off season. Lower inventory ratio also shows that goods with less shelf life will lead to loss to the company. Weak sales will lead to overstocking by company. It also depict that company performance is not so good
	How high inventory turnover ratio affects the company
	Suppose COGS as on July 2019 is 97923 and average inventory value is 44442.5
	Inventory turnover ratio = 97923/44442.5
	2.20 times
	Higher inventory ratio shows that company is sells is strong which is good performance indicator but it also shows that there are chances that company might have insufficient stock of goods which will lead to not fulfilling customer demand. Also it will lead to decrease in holding cost and obsolete inventory