Determining Inventory Levels Merchandising and manufacturing companies keep an inventory of goods held for sale. Management is responsible for determining and maintaining the proper level of goods in inventory. If inventory contains too few items, sales may be missed. If inventory contains too many items, the business pays unnecessary amounts to warehouse, secure, and insure the items, and the company's cash flow becomes one sided-cash flows out to purchase inventory but cash does not flow in from sales. Companies take physical inventories to count how many (or measure how much) of each item the company owns. Inventory is easier to count when sales and deliveries are not occurring, so many companies take inventory when the business is closed. Taking a physical inventory involves internal control principles. Examples of these internal control principles include the following:
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