CHAPTER ONE
1.1 Background of the study
Inventory is the total amount of goods and/or materials contained in a store or factory at any given time. Store owners need to know the precise number of items on their shelves and storage areas in order to place orders or control losses. Factory managers need to know how many units of their products are available for customer orders. Restaurants need to order more food based on their current supplies and menu needs.
The word 'inventory' can refer to both the total amount of goods and the act of counting them. Many companies take an inventory of their supplies on a regular basis in order to avoid running out of popular items. Others take an inventory to insure the number of items ordered matches the actual number of items counted physically. Shortages or overages after an inventory can indicate a problem with theft (called 'shrinkage' in retail circles) or inaccurate accounting practices.
Companies also take an inventory every quarter in order to generate numbers for financial reports and tax records. Ideally, most companies want to have just enough inventories to meet current orders. Having too many products languishing in a warehouse can make a company look less appealing to investors and potential customers. Quite often a company will offer significant discounts if the inventory numbers are high and sales are low. This is commonly seen in new car dealerships as the manufacturers release the next year's models before the current vehicles on the lot have been sold. Furniture companies may also offer 'inventory reduction sales' in order to clear out their showrooms for newer merchandise.
However, an inventory valuation is a statement which provides information about the value of goods held in inventory. Goods in inventory can make up a substantial portion of a company's equity and there is therefore a great deal of interest in the total value of a company's inventory. This information is reported in financial statements which can be used internally and externally for a variety of tasks related to accounting, valuing the company as a whole, and making business decisions.
There are a number of ways to perform an inventory valuation and different approaches to maintaining records about inventory. One method is to record sales and movement of inventory as they occur. For example, when a book sells a copy of a dictionary, it would record the fact that the inventory was short one dictionary while also noting the amount of the sale. This is called perpetual recording, because the inventory numbers are constantly being updated. One advantage to this system is that it provides real time data which can be reviewed at any time and used for everything from inventory valuation to ordering new products to replace things that are selling out. Another method is periodic. In this case, sales are recorded at the time they take place but the change to inventory is not. At the end of a set period, the inventory is manually counted and recorded. One reason why it is important to know which method of inventory valuation to use is because prices shift over time. The difference in accounting methods can change the inventory valuation, depending on which method was used.
An inventory manager controls the goods, materials, products or parts for a company. The inventory may be for in-house use or consist of goods sold or rented to customers. The manager of inventory normally works in conjunction with other departments and is frequently in charge of one or more inventory clerk’s efficient inventory control is normally crucial to a company’s success. The inventory manager is customarily responsible for keeping track of inventory levels and ordering additional merchandise as needed to meet the needs of her company or its customers. Her assessment of current needs and ability to predict future requirements are commonly imperative to her effective control of the inventory.
Depending on the volume of inventory and the nature of the business, an inventory manager may choose different methods to keep track of stock. Some businesses that deal in large volumes of components and parts regularly conduct cycle counts. This practice requires different parts of the inventory to be counted to make sure all parts are inventoried at least once in a specified period, normally six months or a year. Items that are more popular are counted more frequently than slower moving ones, with a handful of items being inventoried every day. In an environment where the inventory is relatively small or the demands on it vary considerably and often, the inventory manager customarily monitors it manually or through a computerized inventory tracking system. She usually has a specific inventory level for each part or product in stock at which she is alerted to reorder. A system that tracks back orders and returns is usually integrated into the mainframe of the program.
To guarantee the largest profit margins are maintained and ensure there are no interruptions in production or sales, an inventory manager typically tracks the costs of storing slow-moving inventory. She regularly compares it to the cost of ordering goods on an as-needed basis. If the latter choice proves to be more profitable, the manager commonly adjusts her inventory ordering and storage systems to increase revenues. Success in this position normally requires excellent attention to detail and exemplary organizational skills. The ability to apply analytically skills to inventory control is generally considered an asset for an inventory manager.
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