Understanding Inventory in Business

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The stock or inventory represents goods purchased, processed or sold in the company at a given time. The stock is the property involved in the operating cycle of a company, and is to be sold as is, or after a production process to be consumed at first use.

The storage section can manage the items available within the company to meet future needs by means of logistic tools and an efficient information system for the organization.

These needs must be met at the right time in the right quantities and in a manner allowing the proper use of the stock. The art of management involves having enough inventory to respond adequately to the needs of the market and not bearing too much of the various costs of inventory (such as storage cost, cost of depreciation, etc).

There are several accounting methods for valuing stock, and regulatory systems with which the enterprise is free to choose the valuation of stocks, but the accounting technique requires constancy in selection.

The most common methods are: FIFO – First In First Out (administrative) assumes that what is first purchased/produced is also the first to be consumed/sold. The value of the stock is currently provided by the recent purchase invoices, plus any added value.

A variation comes in the form of FEFO (First Expiry First Out), where items with shelf life (food, medicine) have to be the first to be consumed/sold according to their date of expiry.

LIFO – (Last In First Out) assumes that goods most recently purchased/consumed, are usually the first to be consumed or sold on a regular basis. The value of stocks will be determined by cost, because the stock consists of old products. This method is cheaper than the FIFO, because products do not have to be brought forward in the statement.

Weighted average – There is a certain period (eg a quarter or a year) an average cost is calculated. This will be weighed, because it takes into account the quantity purchased.

It is possible to distinguish three purposes of the stock, that is, stock transaction to optimize transaction costs and storage costs, stock precaution to avoid out of stocks and stock speculation – taking advantage of price movements.

The main stocks are: the stock of goods. Dealer inventories (resale use items without value added processing by the company). Raw materials inventory represents items purchased from suppliers for further processing.

Stock products in the course manufacturing; (semi-finished products) which represents the items that are not saleable in their current state. The stock of finished products (or end products) represents items that the company may sell after production.

 

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