Why inventory is very important?
Inventory is a current asset. For small store, it is number one asset. For any medium or big retail or manufacturing business, it is very important asset. Based on ending inventory, the cost of goods sold is determined. CGS is figured by adding Beginning inventory to Purchases which is considered goods available for sale and the ending inventory is subtracted from goods available for sale.
Ending inventory is the result of selling or using products during the period from the goods available for sale. If ending inventory is overstated, the cost of goods sold will be understated. Therefore, it is important to have accurate ending inventory value to be able to have accurate cost of goods sold whether we are talking about retail or manufacturing.
Manufacturing inventory has raw materials, finished goods, and in production. Retail has products purchased for resale. For manufacturing, it can be harder to track the inventory, but it is even more important to track it than retail because raw materials are easy to be wasted. Therefore, inventory can be your worst or best asset. It is like a friend has to be treated good all the time; otherwise, it can cause trouble. Inventory is important because it is what you are selling or using for production. If you are loosing inventory, you have to buy more, so it has double effect on you.
Tracking inventory on monthly basis will help the business in many ways. It is important to have actual inventory valuation on your balance sheet because it is the true value. Perpetual inventory is good to have to know how much should
be in inventory, but you still have to have periodic inventory. When the actual count is done, it has to be compared to the calculated figures to see if there are any discrepancies. Discrepancies can be indications of many things.
First, there is a theft. If you should have 100 units, but you only have 90, it could be because someone walked out with 10 units. It could be an indication of storage problem. Then, you need to have security system. If you have tanks to store liquid products, your tanks might be leaking, and that can cause inventory problem. Then, you need to fix your tanks. It also could be an indication that your supplier is not giving you what he is charging you for. If you have the same variance every month, it means there is something going on. For example, you might order 100 Gal of something, but your supplier fills your tank only with 90 Gal every delivery. Also, it could be an indication of spoilage. When you are dealing with cold or perishable products, they can go bad easy if they are not handled carefully. Then, you need to fix your cooler or find out what is wrong. Finally, it is not reporting sales and deliveries correctly. If not all the sales are reported correctly, it is another reason for having problem with inventory.
In conclusion, inventory is very important to any business. It is the meter that measures the business flow. Good inventory helps the business to stay strong. Accountants have to understand the inventory cycle in order to be able to track it and evaluate it correctly.