7 sales and inventory systems.doc.pdf

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Business Systems

Sales and Inventory Systems *Property of STI of 10

Sales and Inventory SystemsPage 1 of 20

Inventory Control Processes and

ConceptsPage 2 of 20

Inventory TerminologiesPage 3 of 20

SALES AND INVENTORY SYSTEMS

From this point forward, the students must learn and apply the businessprocesses to develop a computer-based system. They should have abackground on the different business transactions. It would beimpossible for them to create such systems if they do not know thelogical flow of the processes.

The two Sales Systems concepts are very much related to each otherespecially in the retail type of business. There is another type ofinventory system wherein it focuses on the manufacturing type ofbusiness.

On why sales should be connected to an inventory system, the reason isthat there is a link between the two since the quantity of products in thewarehouse or stockroom is lessened when a sales transaction occurs.

The first type of business process that will be discussed is the Inventorycontrol processes and concepts.

[Sales and Inventory Systems, Page 1 of 20]

Inventory Control Processes and Concepts

What is Inventory?

Inventory is defined as a company's merchandise, raw materials, andfinished and unfinished products which have not yet been sold. It isconsidered as the lifeblood of the business since a list of goods that abusiness has on hand for sale to their customers. In a manufacturingfirm, this may be both raw materials and finished goods. In a retailbusiness, inventory may be considered as the items for resale.

[Inventory Control Processes and Concepts, Page 2 of 20]

Inventory Terminologies

There are several inventory terminologies wherein students mustunderstand and be familiar with. To enumerate some are:

Category A group of items that are related; may also beconsidered as classification; example: cannedgoods, plastic ware, etc.

Product The term used to describe all goods and servicessold which is under a certain category

Physicalcounting

The determination of inventory quantity by actualcount. Annual physical count is done whenbusiness transactions are halted and personnelwould go to the stockroom and count the number of

items. An alternative is cycle counting wherein theaccuracy of inventory records is checked bydetermining a small group of items. This small groupwill be counted daily and checked with the records.

[Inventory Terminologies, Page 3 of 20]



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Inventory Terminologies (cont.)Page 4 of 20

Inventory Terminologies (cont.)

Backorder An unfilled customer order or commitment. Abackorder is an immediate (or past due) demandagainst an item whose inventory is insufficient tosatisfy the demand.

Economic

orderquantity (EOQ)

EOQ is calculated to balance expected cost of

acquisition for stock against the expected costs tohold the stock.

Finishedgoods

A product sold as a completed item or replacementpart; any item subject to a customer order or salesforecast.

Reorderpoint (ROP)

Sum of the forecasted requirements duringreplenishment lead time plus a safety stock

Safety stock Amount of stock planned to be available to protectagainst uncertainty in demand or stock.

[Inventory Terminologies (cont.), Page 4 of 20]


Inventory terminologies (cont.)

Stock status A report of what is on hand, what is due in and whatis owed to customers

Raw Materials Items to purchased by the company to be convertedto finished goods via a manufacturing process

Work inprocess (WIP)

May also be called work in progress or in-processinventory; refers to the raw materials that havestarted the value-adding activity in the manufacturingplant. This may also be referred to the raw materialsthat have been moved from the storage area to theworking place.



Inventory Terminologies (cont.)

Lead time Number of days or amount of time needed betweenordering and receiving goods

Fast-movingitems

Items that must be immediately placed by thecompany to their suppliers to avoid out-of-stocksituation.

Slow-movingitems

Products that do not meet the number of productsthat must be sold in given number of time.




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Inventory ProcessesPage 7 of 20

Inventory Processes

To illustrate, an inventory system handles the following functions:

1. Monitoring of stocks whether items are out-of-stock, below thereorder point, or overstocked. If the items are out-of-stock orbelow the reorder point, a Purchase Order (PO) should be

prepared requesting the needed materials.2. Ordering of raw materials (for manufacturing) or goods (forresale) from suppliers. Once the PO is finalized, the preparedPO is then forwarded to the suppliers. A sequential and uniquePO number is generated to serve as reference for delivery lateron. The number of items to be reordered is based on the EOQ.Note that the lead time is needed to compute for the EOQ.

3. Replenishment of quantity and updating of records of items onceorders are delivered to the company . A Delivery Receipt (DR) orReceiving Slip from your supplier will be forwarded to yourcompany. This will be the basis on how much quantity will beadded to your current stocks-on-hand. In case the quantitydelivered is not complete, a backorder occurs.

4. Monitoring of Invoice for billing purposes. An invoice is definedas document that contains the PO number as reference, namesand addresses of the buyer and the seller, the date and terms ofthe sale, a description of the goods, the price of the goods, andthe mode of transportation used to ship the goods. The sellercalls the invoice a sales invoice; the buyer calls it a purchaseinvoice.

[Inventory Processes, Page 7 of 20]

Inventory Processes (cont.)Page 8 of 20

Inventory Processes (cont.)

5. Physical counting of stocks-on-hand; either through annualphysical counting or cycle counting.

6. Adjustment of inventory; in cases where there is a discrepancybetween the actual physical count and stock status report, anadjustment is recorded using a Stock Adjustment Form toreconcile the records.

7. Generation of reports; several reports can be generated from thedatabase. To enumerate some are:• Detailed inventory report• Summarized inventory report• Reorder List• Item Master List• Purchase Order List• Adjustment report• Fast-moving and slow-moving items report• Back order List

[Inventory Processes (cont.), Page 8 of 20]



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Inventory DocumentsPage 9-16 of 20

Inventory Documents

Several documents have been enumerated earlier. It would be just forthe students to see how each of them looks like and what the use foreach. The succeeding section enumerates all the important documentsused in an inventory processing.

1. Purchase Order - A formal request to a vendor to purchasegoods or services. This document may be sent in eitherhardcopy or electronic format.

2. Receiving slip



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3. Invoice

4. Requisition and Issue slip



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5. Stock Adjustment

6. Transfer order



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7. Re-order List

8. Item Master List

9. Stock Status Report

[Inventory Documents, Page 9-16 of 20]



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Stock Card Page 17 of 20

Stock Card

In current manual system, one important document that is used is theStock Card. The document is an individual record of every item in theitem master list. It shows the date when the goods came in; view themovement on stock per item, location and period. The documentdisplays all the movement of items sold, purchased, returned,

assembled, and transferred.

[Stock Card, Page 17 of 20]

Inventory Valuation MethodsPage 18 of 20

Inventory Valuation Methods

The accounting method that a company decides to use to determine thecosts of inventory can directly impact the balance sheet, incomestatement, and statement of cash flow. There are three inventory-costing

methods that are widely used by both public and private companies:

• First In, First-Out (FIFO) - This method assumes that the firstunit making its way into inventory is the first sold. For example,let's say that a bakery produces 200 loaves of bread on Mondayat $1 each, and 200 more on Tuesday at $1.25 each. FIFOstates that if the bakery sold 200 loaves on Wednesday, the costof goods sold is $1 per loaf because that was the cost of eachthe first loaves into inventory. The $1.25 loaves would beallocated to ending inventory (appears on the balance sheet).

ExampleØ A bakery produces 100 loaves of bread on Monday at Php18.00

each, and 100 more on Tuesday at Php22.00 each.

Ø FIFO states that if the bakery sold 100 loaves on Wednesday,the cost of goods sold is Php18.00 per loaf because that was thecost of each the FIRST loaves into inventory.

Ø The Php22.00 loaves would be allocated to ending inventory.

[Inventory Valuation Methods, Page 18 of 20]



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Inventory Valuation Methods(cont.)Page 19 of 20

Inventory Valuation Methods (cont.)

• Last In, First-Out (LIFO) - This method assumes that the lastunit making its way into inventory is sold first. The outdatedinventory is therefore left over at the end of the accountingperiod. For the 200 loaves sold on Wednesday, the same bakerycompany would allocate $1.25 to cost of goods sold while the

remaining $1 loaves would be used to calculate the value ofinventory at the end of the period.

ExampleØ A bakery produces 200 loaves of bread on Monday at Php18.00

each, and 200 more on Tuesday at Php22.00 each.Ø LIFO states that if the bakery sold 200 loaves on Wednesday,

the cost of goods sold is Php22.00 per loaf because that was thecost of each the LAST loaves into inventory.

Ø The Php18.00 loaves would be used to calculate the value ofinventory at the end of the period.

[Inventory Valuation Methods (cont.), Page 19 of 20]

Inventory Valuation Methods(cont.)Page 20 of 20

Inventory Valuation Methods (cont.)

• Average Cost - This method is quite straight forward, it takesthe weighted average of all units available for sale during theaccounting period and then uses that average cost to determinethe value of cost of goods sold and ending inventory. In ourbakery example, the average cost for inventory would be $1.125per unit, calculated as (200 x $1 + 200 x $1.25)/400.

The most important point in the examples above is that cost of goodssold appears on the income statement, and ending inventory appears onthe balance sheet under current assets.

The reason why valuation is important in inventory is discussed in the

following section. If inflation is nonexistent, then all three of the inventoryvaluation methods will produce the exact same results. When prices arestable our bakery would be able to produce all of the loaves of bread at$1, and FIFO, LIFO, and average cost would give us a cost of $1 perloaf.

Unfortunately, the world is more complicated. Over the long term, pricestend to rise, which means the accounting method can dramatically affectvaluation ratios.

If prices are rising, each of the accounting methods produce thefollowing results:

• FIFO gives us a better indication of the value of ending inventory(on the balance sheet), but it also increases net income becauseinventory that might be several years old is used to value cost ofgoods sold. Increasing net income sounds all good, butremember that it also has the potential to increase the amount oftaxes that a company must pay.

• LIFO isn't a good indicator of ending inventory value becausethe left over inventory might be extremely old and perhapsobsolete. This results in a valuation that is much lower thantoday's prices. LIFO results in lower net income because cost ofgoods sold is higher.



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• Average cost produces results are somewhere in the middlebetween FIFO and LIFO.

(Note: if prices are decreasing then the complete opposite is true.)

One thing to keep in mind is that companies are prevented from gettingthe best of both worlds. If a company uses LIFO valuation when they file

their taxes, which results in lower taxes when prices are increasing, theythen must also use LIFO when they report financial results toshareholders. This lowers net income and ultimately lowers earnings pershare.

Example

• A bakery produces 200 loaves of bread on Monday at Php18.00each, and 200 more on Tuesday at Php22.00 each.

• The average cost for inventory would be Php20.00 per unit,calculated as (200 x Php18.00 + 200 x Php22.00)/400.

[Inventory Valuation Methods (cont.), Page 20 of 20]