Importance Of Inventory Management

Topics: Inventory, Balance sheet, Cost of goods sold Pages: 18 (3276 words) Published: November 30, 2014


October 14


Inventories are tangible goods that are kept for sales within the ordinary course of the business or to be consumed in the productions of goods or services for a later commercialization. Inventories comprehend, in addition to the raw materials, products being processed, and finish products (end item), merchandize for sale, materials, spare parts, accessories to be used during production of goods fabricated for sale (profit) and or presentations services (marketing products), packaging, shipping containers, or simply transit inventories.

The baseline of all commercial enterprise is the “Buy and Sell” of products and services; there is the importance to have a good inventory management. This accountability management will allow the company or firm to maintain timely control as well as remain knowledgeable and well inform about the where does the company stand economically after conducted the inventory. Also the inventory constitute items of current assets that are readily available for sale, meaning all the merchandise still in the warehouse also known as shelf or stock items, that are valued at the cost of acquisition, pending to be distributed and generate profit for the company.


So why do you need inventory? In a just- in- time manufacturing environment, inventory is considered waste. However, in environments where an organization suffers from poor cash flow or lacks strong control over (1) electronic information transfer among all departments and all significant suppliers, (2) lead times, and (3) quality of materials received, inventory plays important roles (Muller, 2001).


Accounting for inventories comprises very important for the accounting of goods, for the sale of inventory is the heart of the business. Inventory is usually the largest asset on their balance sheets, and inventory costs, called cost of goods sold, are usually the largest expense in the income statement.

Enterprises engaged in the purchase and sale of goods, as this is their primary function and which give rise to all other operations, they will need a steady summarized and analyzed information on their inventories, which requires the opening of a number of main and auxiliary accounts related to those controls. Between these accounts we can name the following:

Initial inventory
Returns on purchases
Cost of purchases
Returns on sales
Goods in transit (shipped)
Goods in consignment (retailers)
Final inventory

The Initial Inventory represents the value of the stock of goods on the date that began the accounting period. This account is opened when the inventory control in the General Staff, is carried based on the speculative method, and will no longer be moving until end of the accounting period that will close under cost of sales or by Profit and Loss directly.

In the account, Purchase, goods purchased during the accounting period in order to re- sell them for profit and are part of the object for which the company was established are included. Not included in this account to buy Land, Machinery, buildings, equipment, facilities, etc. This account has a debit balance, is not in the balance sheet of the enterprise, and closes Profit and Loss or Cost of Sales. Returns on sales refers to the account that is created to reflect all that the company purchased merchandise returned for any reason; although this has decreased the purchase of goods shall not be paid to the account purchases.

The costs for purchases of goods should be directed to the account entitled Purchasing costs. This account has a debit balance and is not in the Balance Sheet. According to Muller in the Essentials of Inventory Management, Inventory brings with it a number of costs, including: Dollars, Space, Labor (receive, check...

Bibliography: Dolan, R., Simon, H. (1996). Power of Pricing: How Managing Price Transform the Bottom line. New York, NY, USA.
Moya, J. (1999). Control de Inventario Investigacion de Operaciones 4. (1era ed). Costa Rica.
Muller, M. (2011). Essentials of Inventory Management (2nd ed). New York, NY, USA.
Nagel, T., Hogan, J. & Zale, J. (2011). The Strategy and Tactics of Pricing (5th ed). One Lake street, NJ, USA.: Prentice Hall.
Waters, CDJ. & Waters, D. (1992). Inventory Control and Management.
Department of the Army. Field Manual FM 4-40 (10-1) Quarter Master Operations. October 2013. Chapter 2.
US General Accounting Office. Inventory Management: DOD Can Build on Progress in Using Best Practices to Achieve Substantial Savings. (1995).
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