Question

1- Compare different inventory systems

2. Controlling inventory contributes to good inventory management, explain.

Answer 1

The goods or items that are held for sale in the normal course of business is called Inventory.

Inventory that is used by retailers for Point of sale (POS) is known as Merchandise. Inventory that is used by Manufacture's are Raw Materials, Work in Progress(WIP) and finished inventory.

There are two types of approaches used to maintain inventory in each companies,

1. Perpetual Inventory System

Whenever Purchases and sales occur, the system tracks changes in the inventory accounts known as Perpetual inventory system. Its real time recording and checking the inventory database through sophisticated technologies like Purchases, Sales and inventory transfer etc. inventories are directly changes at the point of sale, updating stock count and cost of goods sold(COGS) as well. This system is very helpful to find out ending inventory without being doing the physical check. Once the sale occur, immediately stock count reduced and Cost of sale increased automatically.

The Basic formula of Perpetual Inventory System is

Opening Inventory + (Purchases - COGS = Closing Inventory

2. Periodic Inventory System

Whenever Purchase or sale is occur, Periodic inventory system does not track COGS and Stock count in real time. at the time of physical verification COGS must be computed at the end of the period. this system is outdated and most of the companies now a days using perpetual inventory system only.

The Basic formula of Perpetual Inventory System is

Opening inventory + Purchases - Closing Inventory = Cost of Goods Sold (COGS)

(2) Inventory is the key factor of each and every business to run smoothly on operations. so that controling inventory plays key role on business, it should be inventory management can do so. We have to control the inventory from following cases,

Theft

Accidently shipped without an invoice

Damaged and discarded without being recorded

While ending inventory is an asset and impacts the current assets section on the balance sheet and may also impact the current ratio of the company.