MGAB01H3 Lecture Notes - Lecture 12: Internal Control, Working Capital, Weighted Arithmetic Mean
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-What is inventory?
Inventory: the goals for company to sale to make cash.
-What determine the size of inventory:
Too much inventory: limit cash, inventory is less flexible than cash.
Too little inventory: no stock will hurt customer
-Working capital: AR + inventory-AP, the amount of the loan we need
It is also an Important number for many firms
Accounting system: not only provide information to investor but also to manager,
help protect assets in case that anyone steal from company.
There are two kinds of company: - manufactory firm: really manufacture some product
-Merchandiser: buy product from manufactory firm. Example : Walmart
We can count how many items we have or how much is the total value of item. Then
convert to dollar, allocate the amount between ending balance and cost of goods sold
Beginning inventory + purchase – cost of goods sold = ending inventory. Use this
formula, we can calculate any factor in this formula when we know other three factors.
For manufactory company:
-First, they will purchase raw materials. During this period,
raw materials inventory goes up, assets goes down or liabilities goes up at the same
-Then, the company will use raw material to produce.
Work in process inventory goes up, raw material inventory goes down.
In this process, the cost of labor which directly work on the product will increase work
in process inventory. Manufacturing will increase work in process inventory.
-After complete the produce
Finished goods inventory goes up, work in process inventory goes down.
-finally, we make sale
Finished goods inventory goes down, cost of goods sale goes up
Assumption: because manufactory are more complex, unless we mention that, we will
assume merchandisers firm.
Two systems to record inventory
-Perpetual system: every sale will reduce inventory and increase money. Every
transaction will cause another transaction
-periodic system: doesn’t need to keep balance, count the physical inventory. It is very
Although, only small company use the periodic system, but it is still used as a way to
internal control. Check whether the physical inventory is equal to book