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Inventory Accounting Calculation
The accounting calculation to value inventory and
cost of sales is as follows:
Beginning inventory
Plus: Purchases
(material, labor and overhead)
Equals: Cost of goods
available for sale
Less: Ending inventory
Equals: Cost of goods
sold.
I have included this basic accounting concept, since
many companies have automated systems that blur accounting theory and
practice. Automation makes it difficult for auditors, accountants, and
investors to follow and understand inventory concepts. This is the age-old
argument of the drawbacks of automation. The accounting craftsmen and their
knowledge are disappearing with the automation of the accounting process.
This lack of inventory knowledge is being compounded by the U.S. moving more
and more towards a service economy, with manufacturing jobs being sent
overseas to places like China. Investors, however, need to understand the
nuances of inventory to avoid panic situations, or to benefit from them, if
inventory issues arise.
In the
recent past, I attended a SEC reporting seminar in New York City. The
instructor surveyed the class as to how many attendees currently worked for
manufacturing companies. Only a colleague and I were involved in
manufacturing. My interpretation of the situation was: as the manufacturing
jobs leave the country, the knowledge leaves with it.
Click here for information on:
-Focus on the Profit Margins
-Perpetual vs. Periodic Inventory
-Inventory Costing Methods
-Lower of Cost or Market
-Inventory Categories
-Inventory Turnover Ratios |
