What Is an Inventory Investment?
Maintaining a modest inventory is an investment decision often faced by operators in manufacturing and commerce. Inventory is the stock of products in the production process and finished products for sale, including raw materials, work in progress, and finished products for sale temporarily held by the enterprise. The ratio between the annual inventory and final product output in the United States is about 23% -35%, that is, the inventory owned by the enterprise is actually equivalent to the value of the final product for 3-4 months.
Inventory investment
Right!
- Maintaining a modest inventory is an investment decision often faced by operators in manufacturing and commerce. Inventory is the stock of products in the production process and finished products for sale, including raw materials, work in progress, and finished products for sale temporarily held by the enterprise. The ratio between the annual inventory and final product output in the United States is about 23% -35%, that is, the inventory owned by the enterprise is actually equivalent to the value of the final product for 3-4 months.
- In inventory investment, the most important is the division of voluntary inventory (planned inventory) and involuntary inventory (unplanned inventory). Inventory investments can be higher in both cases.
- First, if the sales volume is unexpectedly low, the company will find that the shelves are full of inventory, which is involuntary
- There are many reasons why companies want to own inventory or invest in it.
Inventory investment principles
- At the balance sheet date, inventories should be measured at the lower of cost and net realisable value. If the cost of inventories is higher than its net realisable value, provisions for inventory depreciation should be made and included in the current profit and loss. Among them, the net realizable value refers to the amount of the estimated selling price of the inventory in daily activities minus the estimated cost to be incurred upon completion, the estimated sales expenses and related taxes; the cost of inventory refers to the actual inventory at the end of the period cost. If the enterprise uses simplified accounting methods such as planned cost method and sale price amount calculation algorithm in the daily calculation of inventory cost, the cost should be adjusted
- Inventory investment
Inventory investment method
- (1) Judgment of signs of inventory impairment
- If the inventory has any of the following conditions, it means that the net realizable value of the inventory is lower than the cost:
- 1. The market price of the inventory continues to fall, and there is no hope of recovery in the foreseeable future;
- 2. The cost of the product produced by the company using the raw material is greater than the sales price of the product;
- 3. Due to product upgrades, the original stock of raw materials no longer meets the needs of new products, and the market price of the raw materials is lower than its book cost;
- 4. Due to outdated goods or services provided by enterprises or changes in consumer preferences, market demand changes, resulting in a gradual decline in market prices;
- 5. Other circumstances sufficient to prove that the inventory has actually been impaired.
- If one of the following conditions exists for the inventory, the net realizable value of the inventory is zero:
- 1. Inventory that has been rotten;
- 2. Inventories that have expired and have no transfer value;
- 3. Inventories that are no longer needed in production and have no use value or transfer value;
- 4. Other inventories sufficient to prove that there is no use value or transfer value.
- (2) Determination of net realizable value
- 1. An enterprise's determination of the net realisable value of inventories shall be based on solid evidence obtained, and shall take into account factors such as the purpose of holding the inventories and the impact of events after the balance sheet date.
- 2. The net realisable value of the finished goods, goods, and materials used for sale, etc., is the net realisable value. In the normal production and operation process, the estimated selling price of the inventory minus the estimated sales expenses and related taxes and fees. Of the amount.
- 3. Inventories of materials that need to be processed. If the net realizable value of the finished product produced by them is higher than the cost, the material should still be measured at cost; if the decline in the price of materials indicates that the net realizable value of the finished product is lower than the cost, the material It should be measured at the net realizable value. Its net realisable value is the amount of the estimated selling price of the finished product produced with the material in the normal production and operation process minus the estimated costs, sales expenses and related taxes and fees that will occur when it is completed.
- 4. For inventories held for the execution of sales contracts or labor contracts, the net realisable value shall be calculated based on the contract price.
- If the quantity of the same inventory held by an enterprise exceeds the quantity ordered in the sales contract or labor contract, the net realisable value shall be determined separately, and the corresponding cost shall be compared with each other, and the amount of the inventory depreciation reserve shall be determined or reversed. The net realizable value of the inventory exceeding the contract part shall be calculated on the basis of the general sales price.
- (3) Accounting for inventory depreciation reserve
- 1. Accrual of inventory depreciation provisions
- On the balance sheet date, the cost of the inventory is higher than the net realizable value, and the enterprise should make provision for inventory depreciation. Provision for inventory depreciation should normally be made on a single inventory item basis. However, for a large amount of inventory with a low unit price, provision for inventory depreciation can be made according to the inventory category. Related to a product line produced and sold in the same region, having the same or similar end use or purpose, and difficult to relate to other projects
- Inventory investment
- 2. Confirmation and reversal of inventory depreciation provisions
- On each balance sheet date, the company should compare the cost of inventory with the net realizable value, calculate the inventory depreciation reserve that should be accrued, and then compare it with the raised amount. If the raised amount is greater than the raised amount, it should be supplemented. The provision for inventory depreciation provided by an enterprise shall be included in the current profit and loss (asset impairment loss). When the influencing factors of the previous write-down of the inventory value have disappeared, the write-down amount should be restored and reversed within the original provision for the inventory depreciation reserve. The reversed amount is included in the current profit and loss (asset impairment loss).
- 3. Carry forward of inventory depreciation provisions
- The enterprise has made provision for inventory depreciation. If some of the inventory has been sold, the enterprise shall carry forward the provision for inventory depreciation already carried forward when carrying forward the cost of sales. For inventories transferred out due to debt restructuring and non-monetary transactions, the provision for inventory depreciation should be carried forward at the same time, but the current management costs will not be deducted, and the accounting treatment shall be based on the principles of debt restructuring and non-monetary transactions. Where provision for inventory depreciation is made according to the type of inventory, the corresponding inventory depreciation reserve shall also be carried forward in proportion.