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Managing Inventory - Complete Controller

Managing inventory is a crucial part of carrying on business operations and is also part of the tailored process. However, the frequency or kind of inventory management varies from company to company. Every type of business must try to eliminate human error from inventory management mechanisms. The partaking of human error in inventory management can lead to misrepresentation of results. Therefore, it is pragmatic to have some application of software to manage the inventory efficiently. Most of the finance applications have a built-in feature of inventory management. They can easily be linked up with the primary business of the application also. Regardless of which inventory management system the business deploys, below mentioned are some techniques that can help in facilitating an accurate cash flow statement. Check out America's Best Bookkeepers

It is essential and a vital part of every inventory management to set up certain thresholds and parameters of each line of the product in which the company is dealing. Limits can have an upper ceiling, a floor, and a critical minimum level of product that needs monitoring at all times. This is the JIT (Just in Time) Inventory methodology. If the is critical minimum is nearing, the application automatically sends a prompt indicating the inventory is below the bare minimum threshold.

Although before deciding which system or mechanism of inventory management to use, thorough research must be done and the threshold parameters set up. It will not only systemize the inventory management process but will effectively assist in decision-making instances. At times, the inventory management application, if adequately interfaced with the vendor’s system, then the application will directly talk with the other system and order automatically. Check out America's Best Bookkeepers

 

Adaptation of an effective inventory management system or mechanism in a swift manner is another way of improving inventory management. As a business owner, the person needs to understand which stock is a slow seller and which product is fast-moving. Keeping this aspect in mind, the owner needs to adapt and deplete the slow movers with the fast-moving consumer goods to troubleshoot and preemptively come up with the solution, even if it requires expanding the current storage of the warehouse facility.

Having a cordial relationship with the supplier is empirical. It is up to the supplier, which of its current buyers are in good books. In this way, the suppliers will be encouraged to solve the issues, work in tandem, and keep the supply organized, provided the payments are on time, and all financial obligations fulfilled. Especially, having a warm relationship with the supplier of the product has long-term and reaping benefits. Orders placed in bulk or minimum quantity can be easily negotiated. The secret to the relationship is effective communication. Always notify the supplier if the business is going to witness a sudden seasonal surge in the sales so that the supplier can readjust the production cycle at its end. This communication will eventually help in gaining confidence in the supplier. Check out America's Best Bookkeepers

Reliance on one supplier may not be prudent for a large-scale corporation. The concentration is not a positive aspect in the eyes of the management and financial institution. Therefore, it is imperative to have a mix of suppliers of the same product as part of a contingency plan. For instance, the main and perhaps the only supplier is hit by the price hike in raw materials and forced to shut down a business due to some unavoidable circumstances. It will hurt other associated businesses too. By having an array of suppliers, the business owner is at liberty to negotiate different terms of credit and prices with each one.

So when the business wants to plug the leaking hole in the revenue stream, it is just about time to take control of the inventory management and adapt to the conditions.

Check out America's Best Bookkeepers About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks™️ file, critical financial documents, and back-office tools in an efficient and secure environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity. Check out America's Best Bookkeepers

Every retail business has an unsold inventory that collects over time. In practice, retail functions by selling products, but no retail business operates at 100% efficiency and sells out everything in the inventory. Little do we know that unsold inventory can directly affect the amount you pay for taxes. To put it simply, your taxes depend on how much profit you generate during the year. And the profit you make is a function of inventory purchased and sold out. Hence, inventory has a direct impact on the tax you’d pay. In this article, we have broken down all the details you need to know.

 

Inventory Value- The Retail Method

Every retail business should value inventory at the end of the year. Here’s how to use the retail method of valuing inventory: multiply the unsold inventory with average markup percentage. The retail method of valuing inventory works if you have a consistent markup percentage. Once you have figured out inventory value at the end of the year, subtract the value from the total inventory you have purchased during the year. This gives you the cost of goods sold. Evaluating this is an essential step towards computing your taxes. Check out America's Best Bookkeepers

 

Inventory and Profits

Your sales make your total revenue. The cost of goods sold is subtracted from total revenue to figure out profit. The taxes you pay are based on this profit. How you will report your profit depends on the kind of business you run and the structure you follow. The corporate structure you follow is based on how your assets are protected.

 

Inventory and Tax

The value of your inventory depends on its purchase cost. Worthless items must not be counted as inventory. The higher the cost of goods sold, the more deductions are made from your total sales revenue, lower your profit and the tax that you will have to pay.  Check out America's Best Bookkeepers

You get no tax advantage in keeping an inventory that is not needed for running a business. Inventory purchases are not deducted from tax until the inventory becomes useless, is sold, or is removed.  On the other hand, keeping less than necessary inventory does not help in reducing your taxes. Some companies use “just in time inventory” method to conserve cash. By trying to time the inventory with the production process, some companies can save some money and avoid excess facility costs.

 

Get your sheets right. Record everything

The significance of creating sheets is evident because it produces accountability. The primary purpose of any business is to earn profits. A measurable way for businesses to regulate the financial and economic profitability of an investment project is the capital budgeting process and keeping their records straight. The processes involved in the capital budgeting process are:

  • To develop and formulate strategic goals.
  • To find out innovative investment projects.
  • To evaluate and forecast future cash flows.
  • To facilitate the transfer of information.
  • To Monitor and Control the Expenditures 
  • To make a decision

 A balance sheet is used to account for the financial position such as liabilities, amount of assets, and the stockholders’ equity of an accounting unit at a specific point in time. Check out America's Best Bookkeepers

 

The income statement can be explained by the statement of the earnings, statement of the income, or statement of the procedures. It pertains to the accountant’s key evaluation of the progress of a business, proceeds fewer costs throughout the accounting time.

 

The statement of cash flows splits cash inflows and outflows (receipts and payments) into three basic groups of cash flows in a business- cash flows from investing, operating, and financing events. The name of the entity, the title of the report, and the unit of measure used in the statement is classified through the heading. This statement is similar to the income statement; it includes a particular period that is the accounting period.

Consult a Specialist

Consult a specialist who can guide you in the best way you can reduce paying additional taxes. A consultant will help you decide the right method for organizing assets and managing inventory.

 

Check out America's Best Bookkeepers About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks™️ file, critical financial documents, and back-office tools in an efficient and secure environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity. Check out America's Best Bookkeepers

The cost of goods sold is the expenses that go into the goods before the sale. There are different costs associated with the goods that are sold by a business. The goods pass through several processes before the sale, and each process carries certain costs. Meanwhile, the calculation cost of goods sold is the part of the company’s bookkeeping that helps a business to determine the amount of cost incurred stage to the final sale.

There are considerations when calculating the costs. The formula will give you the total cost accurately if followed correctly. It is stocked at the beginning of the period plus purchases during the period minus stocks at the end of the period. It means that stock in the ending of a financial period is subtracted from both purchases that are made during the fiscal period and the stock that was already available with the firm. Check out America's Best Bookkeepers

In addition to the above, if there are no stock items that a business house has in store at any given time and that it intends to sell or use to make a product or render a service. At the beginning or end of the year, the cost of goods sold is also called the cost of sales.

Furthermore, the cost of goods sold by a commercial enterprise includes only purchases, including transportation costs, customs, and various non-refundable taxes. This reveals that the cost of goods sold does not include the cost of purchases only. Still, it also consists of the costs that are expensed on the transportation of goods. The costs that are expensed over the transportation include shipment costs, fuels, logistic costs, which are added to the cost of goods sold. The cost of goods sold also includes the materials that a firm acquires to produce those goods. Check out America's Best Bookkeepers

On the other hand, if there are stocks at the beginning or end of the year, the cost of the goods sold is also called the cost of sales. The main reason for considering the beginning and ending stocks as a cost is that they have been purchased and maintained by the company. 


One of the most essential functions is the role of inventory in determining the cost of goods sold. The inventory has been given the name of stock in beginning and stock at the ending of the period. At the same time, the purchased stock is added to the stock that was available at the beginning of the period. It is also said to be the cost of sales.  Check out America's Best Bookkeepers

Moreover, the cost of goods sold carries a notion of gross profit. As the excess of the operating expenses of a financial year on the gross profit margin can be an excess of the turnover on the cost of the goods sold. The calculation made as follows:

Likewise, operating profit and excess of operating revenue over the cost of goods sold for a given period is determined without reference to operating expenses, other income and expenses, and taxes. When it comes to a manufacturing company, the composition of the cost of goods sold is also called the cost of sales. Moreover, the calculation of the cost of goods sold by a business is more complicated, as demonstrated. Hence, it can be said that a business should have a better understanding of the process of calculating the costs of goods sold to identify what cost has been incurred on each business activity.

 

Check out America's Best Bookkeepers About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks™️ file, critical financial documents, and back-office tools in an efficient and secure environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity. Check out America's Best Bookkeepers

QuickBooks is a software program that helps with bookkeeping. It uses a combination of processing principles associated with accounting, which is packed into a user-friendly interface. It helps make issues like inventory misreading and payroll dilemmas become issues of the past, and with its simple and easy to understand format. Without understanding its capacities relating to essential features that impact business processes to the point of accuracy, simple concepts have to clarify, like why to use it in the first place. And, by choosing to use it, the practices that are exercised in a business have to be compatible with the system of control the software is offering. Check out America's Best Bookkeepers

One of the keys to remember with using QuickBooks is that all items in the inventory of this software have to be billed or checked in so that it can populate lists in the inventory system. This helps it recall with accuracy and effectively give back precise data that will shape the picture of stock levels. Any changes that it carries out on lists created are for eliminating discrepancies and wouldn’t be returning to the inventory, making QuickBooks exact, so the margin of error decreases. The Inventory Asset Account in it helps track all purchases made, so whenever an item from the list if sold, the cost of goods is spawned, and the inventory asset amount is deducted. Check out America's Best Bookkeepers

The Profit and Loss report can help get over-stated costs of goods sold exterminated, resulting in enhanced exactitude. Review the items in the report and drill down on the cogs, along with tracing irregular postings so that it doesn’t recur. Sometimes running a Profitability report, which can state item-wise, product wise, or sale-wise details. With QuickBooks Profitability reporting, any entry that appears to cost more than it should, can be traced. With such powerful features, businesses rely on the details, such as the above, to seek improvement and, above all, make profits to help them grow and develop. Success with the integration of the system is not alone. It’s the method of application that must be considered as well. 

Always remember to keep in mind that QuickBooks utilizes the Average cost practice of determining cogs. It must be clear that if the cost of a particular item is incorrect, then use must be discontinued, and a new setup is to be prepared. Otherwise, it would take ages for it to balance itself. There are other benefits to using QuickBooks for inventory not only for tracking the cogs but for monitoring sales of products that are activated. It also points out at dust collecting dead inventory. It serves to give a detailed and authentic picture of the inventory and what the business is going to expect in the not so distant future with its effective report generating options. Check out America's Best Bookkeepers

Tracking inventory is an essential part of a business that will enable a business to stay atop of its assets and stocks. This practice keeps tabs on the performance of a business and ensures proper tracking of orders and upcoming deadlines. It displays if a business is making money or losing it with a product to help the business owner decide whether to continue selling it or to drop it from the catalog. Setting up inventory to be able to use the features of QuickBooks is a highly practical and quick solution.

 

 

Check out America's Best Bookkeepers About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks™️ file, critical financial documents, and back-office tools in an efficient and secure environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity. Check out America's Best Bookkeepers

Inventory can be the object of outsourcing. Third-party specialized companies have their technology and methodology for inventorying, specialized expensive software and equipment, as well as the professionally trained staff of specialists whose wages are lower than those of warehouse and office staff often involved in inventory.

Inventory is organized based on the written order of the head of the organization. For its conduct, a commission of at least three people is created. The commission may include specialists of the necessary profile representatives of the internal control of the enterprise. The inventory commission has to perform the following duties.

  • For the timeliness and observance of the order of inventory per the request of the head of the enterprise.
  • For completeness and accuracy of entering the inventory data on the actual balances of inventory items.
  • For the correctness of the instructions in the descriptions of the distinguishing features of commodity-material values ​​(type, grade, brand, size, article, etc.)
  • For the correctness and timeliness of registration of inventory results.

 

Purpose of inventory

Main aims of inventory involve:

  • Determination of the actual number of material and production resources used in the production process;

 

  • Comparison of actual data on the availability of property in kind with data from analytical and synthetic accounting (identification of surpluses and shortages);

 

  • Verification of the completeness and correctness of accounting for the assessment of property and liabilities. Including the possibility of valuing commodity and material resources, taking into account their market value and actual physical condition. It is said to be the primary purpose of the inventory.

Inventory procedure

The inventory procedure consists of several stages.

The first stage is preparatory. It includes the following activities:

  • preparation of an order to conduct an inventory;
  • formation of an inventory commission;
  • Determination of the timing and types of inventory property;
  • Receipt of receipts from financially responsible persons, etc.

 

The second stage is weighing, measuring, counting, identifying, and verifying the actual availability of property and liabilities, as well as drawing up inventory inventories. The third stage is the comparison of the data of inventories with accounting data: discrepancies are detected, identification lists are drawn up, and the causes of differences are determined. In addition to this, the process of bookkeeping can also be used in this process.

The final stage is the registration of inventory results. At this stage, the accounting data are brought into line with the results of the inventory, the persons guilty of false accounting of property are brought to administrative responsibility.

Scheduled Technical Inventory

The scheduled technical inventory process is the most commonly used. This process of inventory is carried out regularly with an interval of not less than five years after the previous inventory (primary or planned). The procedure includes the study of capital construction objects, identification of changes in their technical condition, and documentation of all received information following the provisions of the current legislation of the government.

 

Unscheduled Technical Inventory

The process should be carried out with actual changes in the parameters of capital construction objects. Also, we are talking about both the technical and qualitative aspects of their condition. Most often, this type of inventory is carried out with re-planning and other changes in the characteristics of objects. The same applies to situations in which real estate is subject to exchange or sale. The procedure and timing of the inventory, including cases in which this procedure must be carried out, are determined by the company independently. Also, the company itself determines the list of objects subject to such verification. At the same time, there are several cases when the inventory is mandatory.

  • When transferring the company’s property for rent, sale, redemption;
  • A change of financially responsible persons;
  • When revealing facts of damage or theft of property;
  • In the event of emergencies that could affect the state of the company’s assets;
  • When the firm is liquidated or reorganized;
  • In other cases provided by law.

From the above items, it was evident that the inventory, as an element of the method of accounting, in the situations described is mandatory not only under the law but also in terms of pure logic. After all, without conducting an audit of assets and liabilities in all the cases listed, it would be difficult to talk about the correctness of their reflection in the organization’s account in the future.

Check out America's Best Bookkeepers About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing services to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks file, critical financial documents and back office tools in an efficient and secure environment. Complete Controller’s team of US based accounting professionals are certified QuickBooks™️ ProAdvisor’s providing bookkeeping, record storage, performance reporting and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay services. With flat rate service plans, Complete Controller is the most cost effective expert accounting solution for business, family office, trusts, and households of any size or complexity.

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Inventory

Companies that are involved in the manufacturing and selling of physical goods are required to record them as assets in their books and expenses at the time of their sale. Manufacturing companies usually deal with three different kinds of inventories which are materials, work in process and finished goods. Retailers only have to deal with one inventory which is merchandise. In all cases, a company has to sell inventories in order to make profits. Before it is sold, it serves as an asset for the company, however, after merchandise is sold, the cost coverts into an expense, called Cost of Goods Sold (COGS). The cost is then transferred from a balance sheet to an income statement via journal entry in bookkeeping terms.

Companies maintain a significant amount of inventory to manage their day to day operations. However, it is an important asset which needs to be monitored closely. Storing too much inventory can cause issues related to decreasing cash flows, storage costs and losses in case the item turns archaic. Similarly, too little of it can result in lost sales and customers.

Indirect costs or overhead costs that cover depreciation, factory maintenance, cost of factory management, electricity, etc. are allocated to inventory, depending on the production levels. Overheads are frequently assigned based on direct labor hours or a number of machine hours.

Cost of Goods Sold

Cost of Goods Sold basically represents the cost of goods or merchandise that has been sold to customers. Unlike inventory, which is mentioned on the balance sheet, cost of goods is reported on the income statement. All of the costs that are occurred in order to get the merchandise into the inventory and then ready for sale are included in the cost of goods. The cost of acquiring it from the supplier, shipping costs, and all other costs are included. Direct materials, labor, and overhead costs are also included in the cost of goods sold.

For services, the cost of goods would account for labor, payrolls, and benefits. Basically, all of the direct costs that are associated with the production of the product is the cost of goods. It is important to highlight that goods that are not sold during the year and are still in inventory would not be included to calculate the COGS. Only the goods that were sold are included.

Cost Flow Assumptions

There are basically three methods that are accepted by the IRS to move the cost from the balance sheet to the income statement. FIFO (First In First Out), LIFO (Last In First Out) and Average Cost are the accepted methods. They are exactly what the names suggest. First in first out means that goods that arrive first should be removed first at an original cost. It doesn’t matter if the cost of goods sold has increased for the new batch, you would have to record at an original price. 

Each cash flow assumption can be used in both of the systems mentioned below.

Periodic Inventory System

Under the periodic system, the amount in the inventories account is not updated at the time of purchase. In fact, the account is only updated at the end of a year. This means that for the whole year the account would show the cost of last year’s stock.

All the purchases related to merchandise are recorded in either one or more purchase accounts. At the time of year-end, the purchase accounts are closed and the stock account is matched with the cost of merchandise at hand. Under the periodic system, cost of goods sold does not exist in the account to record the sale of merchandise. It is simply calculated as beginning stock + new purchases – ending stock. You would not be able to calculate it while looking at a general ledger account.

Perpetual Inventory System

Under a perpetual system, the stock account is continuously updated. The cost of merchandise that is purchased from the suppliers is added to the account, while what is sold to the customers is continuously being reduced from the account. There is no room for purchase accounts under this system.

The cost of goods sold account is debited at the time of the sale, exactly for the cost associated with the merchandise. For the sale of any merchandise, there have to be two recorded journal entries. Sales and accounts receivable are recorded as one entry while the other caters to the reduction of inventory and increase in the cost of goods that are sold.

FIFO, LIFO and Average cash flow assumptions are combined with either perpetual or periodic systems to account for the cost of stock at hand. It is up to you to choose any one of them at your convenience. 

Check out America's Best Bookkeepers
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual accounting, providing services to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks file and critical financial documents in an efficient and secure environment. Complete Controller’s team of  US based accounting professionals are certified QuickBooksTMProAdvisor’s providing bookkeeping and controller services including training, full or partial-service bookkeeping, cash-flow management, budgeting and forecasting, vendor and receivables management, process and controls advisement, and customized reporting. Offering flat rate pricing, Complete Controller is the most cost effective expert accounting solution for business, family office, trusts, and households of any size or complexity.

 

 

 

 

 

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Each organization requires an inventory to carry out the various activities aimed at achieving its objectives as a successful business. Stock inventory is created when items are in standby mode before they are used or sold. A stock of items can be found at any stage of the process, initially as raw material, then process stock and, finally, finished stock.

Types of Stock Inventory Management

Businesses rely on different types of inventory to conduct their operations. Some of the most common types are:

  • Raw Material Inventory – Materials intended for production. This inventory allows continuous production and its size is determined by the cost, production time, and priorities of the organization.
  • Work In Process Inventory – Materials that are in the production line waiting between different workstations. This inventory includes products that are allotted to different processing times of workstations.
  • Finished Goods Inventory – Inventory of finished products intended for sale and awaiting delivery to customers.
  • Inventory of Supplementary Materials – Materials that do not directly participate in production but are necessary to complete the process. For example: office supplies, packaging materials, and other products included in the indirect production.

Costs Associated with Inventory Management

Costs associated with inventory management are different depending on the production process and type of finished product. Following are costs associated with inventory management for effective bookkeeping records.

  • Cost of Labor – Includes all costs associated with those responsible for managing inventory. This cost includes salaries and wages paid to warehouse managers, warehouse clerks, and inventory holders.
  • Cost of IT – Includes the cost of purchasing and maintaining computers and software.
  • Cost of Management – Includes building procedures, approving and assimilating them into the system. For example: storage procedures, handling procedures, and delivery procedures.

Benefits Derived from Inventory Management

There are several benefits taken from effective inventory management for the success of a business and proper bookkeeping. Savings on inventory maintenance helps in the optimization of costs associated with inventory maintenance.  They also include costs associated with repeat orders on other products.

Meeting supply times assists in proper inventory management. It enables ongoing production and meeting time schedules and delivery times that are determined in advance. Timely delivery will lead to additional orders and new customers for the business. This indicates that proper inventory management is effective in helping the business succeed.

Maximum utilization of production factors is another benefit of stock inventory management.  Proper management of inventory will enable a continuous production process and will prevent downtime, delays, and idle time in the production process.

Inventory Management – 3 Main Methods


LIFO Method – Last In First Out

This inventory management method is also known as the stack method. The LIFO method is used to determine that the last product that enters the inventory will be the first product to be exported. LIFO is an effective method when it comes to products with a long shelf life.

FIFO Method – First In First Out

According to FIFO stock management, the first product that enters is the last product that leaves the manufacturing facility. It takes into account the shelf life of the product and the validity of the warranty received from the supplier against the product.

JIT – Just In Time

This is one of the most common inventory management methods for products with high maintenance costs. According to this method, a company will order products from the manufacturer exactly at the time of purchase. Inventory management according to consumption is the most economical model for inventory management but requires a high level of control and analysis for demand forecasting and delivery time management.

Inventory Management and IT Services

Inventory management software allows a business to track every exit and entry from the inventory of items in the various warehouses of the organization. Inventory management software is a module of a system that includes sales and purchasing modules to enable data integration and greater manageability, control, and analysis for maintaining costs associated with inventory management.

Linking the IT Sector with Warehouse for Effective Management

The warehouse, along with an inventory management software, will prove as an essential link in the organization’s inventory mechanism. The warehouse ensures proper maintenance of the various materials entering the facility, enables adequate management of inventory, and provides good service to the various factory departments. Inventory management software should enable quantitative inventory management and serial numbers for stock inventory management.

Warehouse management, when done efficiently and professionally, is one of the most important conditions for successful management of a logistics system along with stock management inventory and bookkeeping. Both play a decisive role in helping a business succeed. Here are common activities that are carried out in a warehouse:

  • Handling of deliveries from suppliers
  • Inventory counts and full control of inventory levels
  • Preparation of inventory and supply to various departments through transportation systems
  • Maintenance of physical conditions such as temperature, humidity, and pressure
  • Proximity restrictions for other materials
  • Regular maintenance
  • Receiving finished products from production
  • Receiving orders from customers
  • Preparing shipments to customers

Inventory Management with Serial Numbers

Inventory management according to serial numbers enables tracking transactions of every individual item and managing responsibility with the supplier and customer. Inventory management software allows a company to have the ability to analyze inventory movements such as display sales of items according to different periods per business needs. The software must provide information on the dead stock (unsold inventory) to alert the business of missing items when an item falls below a specified minimum level to reduce costs associated with inventory management.

A key part of inventory management software should be the ability to manage exchanges and returns of the customer. The inventory management software provider should be able to perform a variety of actions against any return of a customer or return to a supplier. For example, withdrawal of the return certificate for monetary credit, replacement of product, replacement of product X in product Y, and replacement with the withdrawal of liability if the product is under warranty.

How Can Software Help in Stock Inventory Management?

Inventory management assists with business inventory, tracking the entry and exit of items from stock, and noting speed and profitably of each sale. The inventory management module consists of a price list for each customer. The software can be helpful in the calculation of profit per invoice.

Check out America's Best Bookkeepers
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual accounting, providing services to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks file and critical financial documents in an efficient and secure environment. Complete Controller’s team of  US based accounting professionals are certified QuickBooksTMProAdvisor’s providing bookkeeping and controller services including training, full or partial-service bookkeeping, cash-flow management, budgeting and forecasting, vendor and receivables management, process and controls advisement, and customized reporting. Offering flat rate pricing, Complete Controller is the most cost effective expert accounting solution for business, family office, trusts, and households of any size or complexity.

 

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A stock of materials and products are at an intermediate stage between the original raw material and finished product. This inventory includes the value of the raw material plus the work invested, supporting documents, electricity, supervision and other direct expenses. Here is how a company can effectively calculate their work in progress inventory to include with their bookkeeping.

1. Manage the Inventory Size

The size of product inventory in the production process stems from the nature of the production, length of the production line, and planning and technological means available to the firm. Since this category can include products of any degree of processing, the extent to which the product inventory is processed should be defined in the process and evaluated for effective calculation of work in progress.

The inventory of products in the process is estimated by two methods. The first method works by conducting calculations from the bottom according to the cost of the raw material plus costs incurred by the firm until its processing stages. The second method is to calculate the selling price minus gross profit and completion expenses, up to the condition of a final product.

2. Effective in Managing Raw Materials Needed in Production

Work in progress (WIP) refers to halfway finished goods that are still in the production procedure. The work in progress does not include raw materials or finished goods. Work in progress normally involves an estimation of raw materials required for an item. As the raw materials are included in an initial stage of the production process, they are automatically included in the cost of extra processing as each unit progresses through the different manufacturing steps.

3. Estimation of Finished Goods for an Accounting Period

Work in progress is useful in providing an estimate for the finished goods throughout an accounting period. The estimation helps the company in determining a valuation to measure the inventory of items that are currently held within the production lines for effective calculation of work in progress. Work in progress is one of the three types of inventory that also includes raw materials and finished goods in bookkeeping records.  

Work in progress might be accounted for on the balance sheet for each accounting period.  It is difficult to calculate the exact cost of a work in progress inventory as there may be many products that are considered work in progress in different phases of production towards the end of the period.  

4.  Quickly Transferring Goods from Work in Progress to Finished Goods

To make the bookkeeping process less demanding, some organizations finish all their work in progress inventory and move them into finished goods inventory before closing the books. This type of bookkeeping is useful because it means that there is no work in progress inventory to represent. An option is to allow a standard level of function for every task related to the work in progress inventory. The theory is that a healthy level of finishing products will be around redress of when the products arrived at the midpoint.

It is conceivable to gauge the measure of ending work in progress. However, the outcome can be inaccurate because of varieties caused by genuine piece levels, rework, and deterioration. The count of ending work in progress is:

Beginning WIP + Manufacturing costs = Cost of Goods Manufactured

5. Reducing Measures of Work in Progress Inventory

From a traditional viewpoint, businesses are in an increasing prominence on reducing the measure of work in progress units in the manufacturing process at any one time. By lowering work in progress, they need to reduce the manufacturing processes that lead to damaged goods in the production line for an effective calculation of work in progress. Minimal work in progress investment is a basis for just in time manufacturing.  An inventory structure is required before a product is sent onto a production process to guarantee an even stream of goods.

From a borrowing point of view, some banks will enable work in progress to be utilized as insurance for advances since incompletely finished inventory is troublesome for them to offer in case of the borrower defaulting on their loan, unless it is near fruition.

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About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual accounting, providing services to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks file and critical financial documents in an efficient and secure environment. Complete Controller’s team of  US based accounting professionals are certified QuickBooksTMProAdvisor’s providing bookkeeping and controller services including training, full or partial-service bookkeeping, cash-flow management, budgeting and forecasting, vendor and receivables management, process and controls advisement, and customized reporting. Offering flat rate pricing, Complete Controller is the most cost effective expert accounting solution for business, family office, trusts, and households of any size or complexity.

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Whenever somone opens a business that involves an inventory, a question that comes up after some time is… How do I value the taxes on something that is continuously fluctuating? How do I evaluate something that has a different value when I buy it versus when I sell it and it’s on the market?

No matter how confusing this all sounds, there are multiple methods to make matters simple for the business owners.

3 Factors that will Determine your Inventory Value

1.  Cost – This is the price you paid for the items in your inventory.

2.  Market Value – ­
This involves evaluating your stock on the basis of the market value of the goods on the specific valuation date.

3.  Retail –
This method involves calculating the value of inventory on your selling price and then reducing a specific markup percentage to arrive at the final cost.

While calculating your inventory value by using any of the above factors, if you come across any kind of item that you consider ‘damaged’ or ‘worthless’, then you may exclude it from your calculation.

Now, as for the methods of calculation, the IRS (Internal Revenue Service) prefers the FIFO (First in First Out) and LIFO (Last in First Out) methods, but there are also other methods that the IRS allows. The IRS recommends both of these methods for Stock Valuation especially in the case of taxes. 

The First In First Out Method in Inventory Valuation

First In First Out (FIFO), it is the assumption that the first things that went into the stock were the first ones to be sold. This is very effective when prices are going up (this is the usual case) and the value of the inventory is recorded to be higher. As the earlier and cheaper items in the stock are subtracted from the entire value of the old and new (expensive) items, this creates a larger taxable amount. However, if this method is used in bookkeeping, it can attract investors to put money in your company and make it easier for your business to get loans for expansion, which is beneficial for many businesses despite the fact that it leads to a higher tax.

The Last In First Out Method of Calculating the Stock Value

The Last In First Out (LIFO) method involves assuming the last item to be bought for resale is the first item to be sold. When prices are increasing, the item at the highest expense is the first one to be sold and, therefore, deducted from the sum of old (cheap) and new (expensive) goods in the inventory. This leads to an overall lower taxable income.

Now, some would be wondering if a mixture of FIFO and LIFO could be adopted into the accounting of a particular business. Even though using multiple valuation methods are allowed, if a company is utilizing LIFO in tax, then they must utilize it in bookkeeping as well. Moreover, if a company’s subsidiary is utilizing LIFO, then the entire company must also employ LIFO in calculating the value of their stock.

Nevertheless, LIFO is the preferred calculation method for many companies, especially those who are looking to cut their taxes.

Advice for Inventory Valuation Methods and the Effect of Stock Size on Tax and Business

Deciding which method to use depends on the goals of your business, whether you are looking for a lower tax bill or wanting to build strong financial books in order to attract investors. Some people think that maintaining a large inventory can get them an advantage in taxable income, however, this is a misconception.

Items in the inventory do not give out any tax-deductible effect until, and unless, they are considered ‘worthless’ or sold, both of which results in them being removed from the stock. You must also ensure that your inventory is not too small, as it gives no advantages in terms of taxes. The ideal solution is to maintain a flow in your stock which involves a delicate balance between the purchases into the stocks and the sales that get out of the stock. This is also really beneficial for business as it cuts down the costs of borrowing money for stock or paying for storage of the supplies.

It is recommended that you consult an accountant to advise you on the stock valuation methods and help you manage your business’ financial records.

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About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual accounting, providing services to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks file and critical financial documents in an efficient and secure environment. Complete Controller’s team of  US based accounting professionals are certified QuickBooksTMProAdvisor’s providing bookkeeping and controller services including training, full or partial-service bookkeeping, cash-flow management, budgeting and forecasting, vendor and receivables management, process and controls advisement, and customized reporting. Offering flat rate pricing, Complete Controller is the most cost effective expert accounting solution for business, family office, trusts, and households of any size or complexity.

 

 

 

 

 

 

Word "Tax" with clock on the office workplace. Business concept.
Inventory management is one important aspect of retail and manufacturing businesses. Inventory is everything that needs to be sold in order for your company to make a profit. Some might think that businesses should be stocked up at all times, regardless of the demand because it isn’t a good notion to disappoint customers. However, there are many costs associated with holding inventory and it might not turn out to be such a wise notion. Furthermore, inventory costs are directly related to the amount of income tax you have to pay at the year-end. The costs of purchasing and storing the inventory are considered as your costs of doing business, which must be accounted for in the income statement. Depending on your method of stating your inventory, the costs may vary.

Inventory Management and Taxable Income

Before calculating taxable income, you need to determine the costs of acquiring the inventory. Commonly, inventory costs will include the purchase price, freight charges and amount of sales tax that has been paid. All of these expenses need to be included in your income statement along with the cost of goods sold. The cost of goods need to be calculated separately and reduces your gross income, which further leads to the reduction of income tax that needs to be paid. When your cost of goods sold is higher, it will reduce your net taxable income and eventually decrease the amount of tax paid.

Inventory Management using FIFO

There are basically four approved methods of recording your inventory. However, the two most commonly used are FIFO (first in first out) and LIFO (last in first out). As the name suggests, the inventory rotates chronologically in and out of storage. All of the inventory items that are bought first are sold first. As the inflation has a direct relation to the cost of inventory, you will have to use cheap units first and so on. Because your cost of goods sold is low, your net income increases, leading to increased income tax that has to be paid.

Inventory Management using LIFO

LIFO is quite the opposite of FIFO as you use your new inventory first and then move on to the oldest. Inflation always raises the prices of products, therefore, more expensive units are sold first. This, in return, increases your cost of goods sold dramatically and reduces your net income. A reduced net income means that that you will have to pay a lower income tax at the end of the year.

Conclusion

Both of these methods of inventory management have their ups and downs. Depending on the need of the hour, companies decide which one to use. Companies normally prefer to use LIFO more often but you have to ask for permission from the IRS by filling out the Form 970. You can also be held responsible for tax liability in case you change the industry of your business. The difference between FIFO and LIFO will be calculated and you will have to pay the tax on the balance.

Large tax payments are a huge concern for large corporations as their earnings are billions of dollars. Their top concern is to save every dollar from taxes. A small business may not have to worry about such issues at the start but, as your business grows, you will have to formulate a solid plan for inventory management. You have to account for every dollar that is spent in acquiring and holding the inventory because it can later come back and hurt you in the form of a significant income tax bill.

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About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual accounting, providing services to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks file and critical financial documents in an efficient and secure environment. Complete Controller’s team of  US based accounting professionals are certified QuickBooksTMProAdvisor’s providing bookkeeping and controller services including training, full or partial-service bookkeeping, cash-flow management, budgeting and forecasting, vendor and receivables management, process and controls advisement, and customized reporting. Offering flat rate pricing, Complete Controller is the most cost effective expert accounting solution for business, family office, trusts, and households of any size or complexity.