INVENTORY EVALUATION PROCESS
Disclosure of the exact inventory value is crucial for a business organization to give a true picture of its financial position and income statement for a given period. Therefore, inventory verification and valuation are important in financial audits. Inventories are assets held for sale, produced for sale, or used to produce goods.
The following equation shows how a company’s inventory is DETERMINED:
- Cost of purchase (including tax, shipping, and handling) minus any trade discounts received.
- conversion costs (including fixed and variable manufacturing overhead) and
- other costs incurred to bring the inventory to its proper and present location and condition.
- Storage facility.
- Administrative work not related to production.
- Cost of sales.
- Payment difference in foreign currency.
- Interest is incurred when invoices are paid late.
Under IFRS, inventories are valued at a lower cost or net realizable value. Inventories revaluation is permitted, but only to the extent that a net realizable impairment loss has previously been recognized. Under US GAAP, inventory is valued at a lower price or market value. Market value is usually equal to replacement cost but must not be greater than net realizable value or less than net realizable value less than the normal rate of return. No further editing is allowed. Inventory is one of the main assets of the financial statements of trading and manufacturing companies.
While valuing a business, this is one of the important aspects to consider. Inventory methods are important to both buyers and sellers.
GUIDE TO INVENTORY ACCOUNTING IN THE UAE
Inventory accounting is very important for retailers. Available inventory is sometimes misinterpreted as unsold items. However, it must be recognized as company property and legally managed. Inventory accounting is the act of properly valuing a business asset so that it can be accurately reported in the year-end financial records, for that matter. Even the VAT (tax) law requires taxpayers to have accounting records and inventory. Accounting services in Dubai can help businesses efficiently account for their inventory.
This article discusses the essentials of inventory accounting according to accepted accounting standards.
WHAT IS INVENTORY ACCOUNTING, AND WHY IS IT IMPORTANT?
Inventory accounting can help you determine how much inventory you have, how much it costs, and how valuable it is to your business. This will help you decide if your business is performing at its best.
INVENTORY ACCOUNTING WORKFLOW:
Costs and assets are recorded when you purchase an item in stock. Because it can be sold, it is an asset. It is reported as income when you sell the item. It has also disappeared from your property list.
This is one of many inventory management methods. Other approaches may be more suitable for your business. One option is to track your inventory as an asset when you buy and only record costs (along with profits) when you sell.
It’s hard to track what you’re spending on products as prices change. Accountants have two options to overcome this.
- WEIGHTED AVERAGE COST (AVCO) METHOD
You can use the average Cost per item for each product line. You can estimate the value of your inventory by multiplying your average Cost by the number of goods you own. While AVCO is a simple approach, it must include important information and work well with large price movements.
- FIRST IN, FIRST OUT (FIFO)
First in, first out (FIFO) is a standard inventory management method that helps businesses manage their inventory efficiently. FIFO, on the other hand, works well for pricing unsold inventory. We assume that the first inventory purchased will also be the first inventory sold using this method. It indicates that an order will be fulfilled using the oldest available inventory.
For the cost stream assumptions, the FIFO method is used. The costs associated with a product should be factored in as the product goes through the next stages of development and when the final inventory items are sold into production. Under FIFO, the Cost of goods purchased in advance is considered pre-recognized. Because inventory has been removed from the company’s ownership, the dollar value of total inventory decreases in the process. Inventory cost can be calculated using many methods, including the FIFO method.
- INVENTORY TRACKING
Inventory tracking refers to the process by which a business regularly keeps track of all its inventory. Raw materials, work-in-progress, and ready-to-sell items are the most common definitions of inventory. Most large companies have entire departments dedicated to managing and tracking inventory. In addition, small businesses often invest a lot of effort in tracking inventory. Therefore, inventory monitoring is very important for this type of business and can be summed up in one word:
Businesses spend a lot of money on inventory, and most want to know where that product is all the time.
WHAT IS INVENTORY?
Inventory is a method of cross-checking the data in your financial records. This is done by counting each item in the inventory that you have on hand.
Compare this number with the information on your balance sheet. It will rarely fit. In most cases, the reality will be less than on paper. Lost goods are said to have been destroyed and abandoned or stolen.
WHAT IS THE MEANING OF INVENTORY?
Before you complete your business tax return, you may need an inventory. In addition, it is a great tool for checking and correcting your financial figures.
For Inventory Management, using a budget helps users avoid waste and unnecessary investment in inventory. Once a budget is prepared on the amount or level of inventory needed for the upcoming year and the types of inventory needed, management can decide on the appropriate use. And can work as hard as possible to achieve the desired level of production and sales according to the prepared budget.
When the business is a retailer, the person buys the finished product at a wholesale price, then, with the addition of a margin, the retailer sells the purchased stock to the public. Inventory accounting plays a decisive role in such a case, as mis-accounting leads to higher financial losses. Retailers find that the inventory in unused and perishable. The retailer can use various sales techniques, such as granting credit, rebates, discounts, free samples, etc. so that demand for merchandise can increase. Retailers can sell and dispose of unused inventory in the business.
THE CREDIT SYSTEM
Especially the banking system has placed stock reports as one of the loan disbursement criteria for credit seekers because stocks indicate a business’s ability to generate income and show the company’s ability to repay debt. Securities and accounts statements prepared by the company must be audited if the company’s turnover exceeds the specified limit for the bank to consider the company using credit facilities.
Therefore, inventory management is an important area of concern for any business entity. Maintaining efficient books and accounts will ensure better business management. Good bookkeeping and its layout are very important for financial and business management. With the help of an accountant’s knowledge and practical accounting experience, inventory can be properly managed.