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Unformatted text preview: e beyond expectations. Therefore we need the best employees who can meet this challenge! The Power of Knowledge Engineering Plug into The Power of Knowledge Engineering. Visit us at www.skf.com/knowledge Download free ebooks at bookboon.com 42 Inventory Management Current Assets: Part II 10. Inventory Management The best run companies will minimize their investment in inventory. Inventory is costly and involves the potential for loss and spoilage. In the alternative, being out of stock may result in lost customers, so a delicate balance must be maintained. Careful attention must be paid to the inventory levels. One ratio that is often used to monitor inventory is the Inventory Turnover Ratio. This ratio shows the number of times that a firm’s inventory balance was turned (“sold”) during a year. It is calculated by dividing cost of sales by the average inventory level: Inventory Turnover Ratio = Cost of Goods Sold/Average Inventory If a company’s average inventory was $1,000,000, and the annual cost of goods sold was $8,000,000, you would deduce that inventory turned over 8 times (approximately once every 45 days). This could be good or bad depending on the particular business; if the company was a baker it would be very bad news, but a lumber yard might view this as good. So, general assessments are not in order. What is important is to monitor the turnover against other companies in the same line of business, and against prior years’ results for the same company. A declining turnover rate might indicate poor management, slow moving goods, or a worsening economy. In making such comparisons and evaluations, you should now be clever enough to recognize that the choice of inventory method affects the reported amounts for cost of goods sold and average inventory. As a result, the impacts of the inventory method in use must be considered in any analysis of inventory turnover ratios. Please click the advert Are you considering a European business degree? LEARN BUSINESS at univers ity level. We mix cases with cutting edg e research working individual ly or in teams and everyone speaks English. Bring back valuable knowle dge and experience to boost your care er. MEET a culture of new foods, music and traditions and a new way of studying business in a safe, clean environment – in the middle of Copenhagen, Denmark. ENGAGE in extra-curricular acti vities such as case competitions, sports, etc. – make new friends am ong cbs’ 18,000 students from more than 80 countries. See what we look like and how we work on cbs.dk Download free ebooks at bookboon.com 43 Inventory Errors Current Assets: Part II 11. Inventory Errors In the process of maintaining inventory records and the physical count of goods on hand, errors may occur. It is quite easy to overlook goods on hand, count goods twice, or simply make mathematical mistakes. Therefore, it is vital that accountants and business owners fully understand the effects of inventory errors and grasp the need to be careful to get these numbers as correct a...
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