INVENTORY

1. INVENTORY Prepared by: Samah Mikki Lecturer: Ezz El Arab El Awoor

2. Inventory?MeanWhat Does The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale. Inventory represents one of the most important assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders/owners.

3. Inventory What Is Inventory?Inventory is defined as assets that are intended for sale, are in process of being produced for sale or are to be used in producing goods

4. The following equation expresses how a company's inventory is determined: Beginning Inventory + Net Purchases – Cost of Goods Sold ( COGS) = Ending Inventory In other words, you take what the company has in the beginning, add what they have purchased, subtract what they've sold and the result is what they have remaining.

5. How Do We Value Inventory? The accounting method that a company decides to use to determine the costs of inventory can directly impact the balance sheet, income statementandstatement of cash flow. There are three inventory-costing methods that are widely used by both public and private companies: First-In, First-Out (FIFO) Last-In, First-Out(LIFO) Average Cost

7. First-In, First-Out(FIFO) This method assumes that the first unit making its way into inventory is the first sold. For example, let's say that a bakery produces 200 loaves of bread on Monday at a cost of $1 each, and 200 more on Tuesday at $1.25 each. FIFO states that if the bakery sold 200 loaves on Wednesday, the COGS is $1 per loaf (recorded on the income statement) because that was the cost of each of the first loaves in inventory. The $1.25 loaves would be allocated to ending inventory (appears on the balance sheet)

8. Last-In, First-Out(LIFO) - This method assumes that the last unit making its way into inventory is sold first.. The older inventory, therefore, is left over at the end of the accounting period. For the 200 loaves sold on Wednesday, the same bakery would assign $1.25 per loaf to COGS while the remaining $1 loaves would be used to calculate the value of inventory at the end of the period

9. Average Cost This method is quite straightforward; it takes theweighted averageof all units available for sale during the accounting period and then uses that average cost to determine the value of COGS and ending inventory. In our bakery example, the average cost for inventory would be $1.125 per unit, calculated as [(200 x $1) + (200 x $1.25)]/400

10. Why Is Inventory Important? Inventory management is a very simple concept - don't have too much stock and don't have too little. Since there can be substantial costs involved in straying above and below the optimal range, careful inventory management can make a huge difference in the profitability of a business. Although the concept is simple, the process of getting the right balance can be quite a complex and time consuming task without the right technology.

11. Conclusion As a final note, many companies will also state that they use the "lower of cost or market". This means that if inventory values were to plummet, their valuations would represent the market value (orreplacement cost) instead of FIFO, LIFO or average cost. Understanding inventory calculation might seem overwhelming, but it's something you need to be aware of. Next time you're valuing a company, check out its inventory; it might reveal more than you thought.