Why is inventory control important to managers such

This preview shows 4 out of 6 pages.

Why is inventory control important to managers such as those at Wal-Mart and Best Buy? ACCOUNTING ACROSS THE ORGANIZATION DETERMINING INVENTORY QUANTITIES No matter whether they are using a periodic or perpetual inventory sys- tem, all companies need to determine inventory quantities at the end of the accounting period. When using a perpetual system, companies take a physical inventory for two purposes: The first purpose is to check the ac- curacy of their perpetual inventory records.The second is to determine the amount of inventory lost due to wasted raw materials, shoplifting, or employee theft. Companies using a periodic inventory system must take a physical inventory for two different purposes: to determine the inventory on hand at the balance sheet date, and to determine the cost of goods sold for the period. Determining inventory quantities involves two steps: (1) taking a physical in- ventory of goods on hand and (2) determining the ownership of goods. Taking a Physical Inventory Taking a physical inventory involves actually counting, weighing, or measuring each kind of inventory on hand. In many companies, taking an inventory is a formidable task. Retailers such as Target , True Value Hardware , or Home Depot have thousands of different inventory items. An inventory count is generally more accurate when Describe the steps in determining inventory quantities. S T U D Y O B J E C T I V E 1 PDF Watermark Remover DEMO : Purchase from to remove the watermark
Image of page 4

Subscribe to view the full document.

goods are not being sold or received during the counting. Consequently, companies often “take inventory” when the business is closed or when business is slow. Many retailers close early on a chosen day in January— after the holiday sales and returns, when inventories are at their lowest level—to count inventory. Recall from Chapter 5 that Wal-Mart had a year-end of January 31. Companies take the physical inventory at the end of the accounting period. 1 Determining Ownership of Goods One challenge in computing inventory quantities is determining what inventory a company owns. To determine ownership of goods, two questions must be an- swered: Do all of the goods included in the count belong to the company? Does the company own any goods that were not included in the count? GOODS IN TRANSIT A complication in determining ownership is goods in transit (on board a truck, train, ship, or plane) at the end of the period. The company may have purchased goods that have not yet been received, or it may have sold goods that have not yet been delivered. To arrive at an accurate count, the company must determine own- ership of these goods. Goods in transit should be included in the inventory of the company that has legal title to the goods. Legal title is determined by the terms of the sale, as shown in Illustration 6-1 and described below.
Image of page 5
Image of page 6
You've reached the end of this preview.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern