By Ashani Wick, Certified Business Accountant, FMAAT, B.Com.(Special)

Effective inventory control is all about having the right product and quantities in the right place, at the right time. Maintaining accurate inventory records and inventory levels is key to the success of any business that deals with tangible product sales.

Accurate inventory valuation is crucial for proper financial reporting. Incorrect Inventory valuations will affect financial reporting which leads to wrong decision making in the business operations

So, let’s get an understanding of inventory management and the trends of future of inventory controls.

Costing methods of inventory

• First In, First Out (FIFO)
• Weighted Average method
• Last In, First Out (LIFO)

Each of above three costing approaches will produce a different result over the same accounting period. Therefore, it is necessary to choose one method and apply consistently across future reporting periods to maintain accuracy and consistency.

At the end of an accounting period, the total value of stock-in-hand, is recorded as inventory under current assets.

Inventory discrepancies

An inventory discrepancy is when the actual on-hand inventory stock is different from the item quantity recorded in an inventory system or records

Inventory discrepancies affect the ‘Cost of Goods Sold’ (COGS) calculation. The COGS is subtracted from sales to get the gross profit. So, differences in COGS will have a direct impact on a company’s income statements. An overstated inventory will inflate gross profits and conversely understating inventory will harm gross profits.