Accounting Chapter 18 Review

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Controlling Inventory:
It is important for business owner’s to constantly monitor the inventory held by a trading business since the success or failure of a business is often decided by the decision-making of management in relation to its inventory. Inventory is the most valuable asset reported in the balance sheet. If inventory is not managed effectively, the overall performance of a trading firm will suffer and so will the returns to the owner in terms of profit. As the success of a trading firm is based on the buying and selling of goods, the management and control of inventory is crucial to this objective.

Setting minimum and maximum levels of inventory:
Minimum and maximum levels of inventory should be set for every line of stock. That is, every type of stock must be considered separately and an ideal quantity is decided for each line as a business that carries too little stock is likely miss out on potential sales, while a firm that carries too much stock may suffer from ‘dead stock’. In a perfect situation, the minimum quantity should be just enough to satisfy sales until a new order is delivered. The principle of just in time ordering is a method of purchasing inventory whereby the new order of goods arrives just before the business runs out of stock. Of course, this does not always happen as customers are not always predictable in their behaviour.

Physically rotating stock on hand:
All forms of inventory should be rotated when new stock arrives so that the old stock is placed on prominent display, with the new units placed behind or under them as the longer the item sits in a shop the more likely it is to become dirty, dusty, damaged or expired (perishable items and medication). Stock affected like this is referred to as ‘shop soiled’. The rotation of stock is based on the physical movement of goods and not the assumption of FIFO valuation. Management should always ensure that it looks after its inventory and presents it in the best...
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