62. Merchandising Operations. Merchandising Income Statement. Inventories. Торговые операции. Отчет о прибыли торговой организации. Товарные запасы.

Inventory is tangible property that is (1) held for sale in the normal course of business or (2) used to produce goods or services for sale. Inventory is reported on the balance sheet as a current asset because it normally is used or converted into cash within one year or the next operating cycle. The types of inventory normally held depend on the characteristics of the business.

Merchandisers (wholesale or retail businesses) hold the following:

- Merchandise inventory Goods (or merchandise) held for resale in the normal course of business. The goods usually are acquired in a finished condition and are ready for sale with- out further processing.

Manufacturing businesses hold three types of inventory:

-Raw materials inventory: items acquired for processing into finished goods.

-Work in process inventory: goods in the process of being manufactured but not yet complete.

-Finished goods inventory: manufactured goods that are complete and ready for sale.

Goods in inventory are initially recorded at cost. Inventory cost includes the sum of the costs incurred in bringing an article to usable or salable condition and location. Any additional costs related to selling the inventory to the dealers, such as marketing department salaries and dealer training sessions, are incurred after the inventory is ready for use. So they should be included in selling, general, and administrative expenses in the period in which they are incurred.

Merchandising business earns income by buying or selling goods, which are called merchandise inventory. So, merchandising businesses engage in a series of transactions called the operating cycle. The operating cycle is the average days’ inventory on hand plus the average number of days to collect credit sales. The transactions that make up operating cycle:

1. Purchase of merchandise inventory for cash or on credit

2. Payment for purchases made on credit

3. Sales of merchandise inventory for cash or on credit

4. Collection of cash from credit sales

When merchandisers purchase inventory on credit, which they usually do, they have a period of time before the payment is due. To finance the inventory until they sell it and collect payment for it, merchandisers must rely on CF from within the company or from borrowing. If they lack the cash to pay bills when they come due, they can be forced out of business. Thus, managing cash flow is a critical concern.

The financing period is the amount of time from the purchase of inventory until it is sold and the payment is collected, less the amount of time the creditors give to the company to pay for the inventory. During the financing period, the company will be without cash with this series of transaction and will need either to have funds available internally or to borrow from a bank.

By reducing its financing period, a company can improve its cash flow. Many merchandisers do this by selling as much as possible for cash.

Choice of Inventory System. In a complete perpetual inventory system, the inventory record gives the amount of both ending inventory and cost of goods sold at any point in time. Under this system, a physical count should also be performed from time to time to ensure that records are accurate in case of errors or theft. In a perpetual inventory system, purchase transactions are recorded directly in an inventory account. When each sale is recorded, a companion cost of goods sold entry is made, decreasing inventory and recording cost of goods sold. As a result, information on cost of goods sold and ending inventory is available on a continuous (perpetual) basis. Under the periodic inventory system, no up-to-date record of inventory is maintained during the year. An actual physical count of the goods remaining on hand is required at the end of each period. The number of units of each type of merchandise on hand is multiplied by their unit cost to compute the dollar amount of the ending inventory. Cost of goods sold is calculated using the cost of goods sold equation.

As with a change in accounts receivable, a change in inventories can have a major effect on a company’s cash flow from operations. Cost of goods sold on the income statement may be more or less than the amount of cash paid to suppliers during the period. Since most inventory is purchased on open credit (borrowing from suppliers is normally called accounts payable), reconciling cost of goods sold with cash paid to suppliers requires consideration of the changes in both the Inventory and Accounts Payable accounts.

NB! We must distinguish cash flow, cost flow and goods flow. Cost flow (IS) can exist without cash flow (CFS), while cost flow (IS) can exist without actual goods flow (FIFO vs LIFO) also.

FIFO and LIFO Methods are accounting techniques used in managing inventory and financial matters involving the amount of money a company has tied up within inventory of produced goods, raw materials, parts, components, or feed stocks. These methods are used to manage assumptions of cost flows related to inventory, stock repurchases, etc.

FIFO stands for first-in, first-out, meaning that the oldest inventory items are recorded as sold first but do not necessarily mean that the exact oldest physical object has been tracked and sold.

LIFO stands for last-in, first-out, meaning that the most recently produced items are recorded as sold first. Since the 1970s, some U.S. companies shifted towards the use of LIFO, which reduces their income taxes in times of inflation, but with International Financial Reporting Standards banning the use of LIFO, more companies have gone back to FIFO. LIFO is only used in the U.S. The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve. This reserve is essentially the amount by which an entity's taxable income has been deferred by using the LIFO method.

NB! Согласно Скалкину при LIFO прибыль увеличивается!

The simplest way to think about the effects of changes in inventory is that buying (increasing) inventory eventually decreases cash, while selling (decreasing) inventory eventually increases cash. Similarly, borrowing from suppliers, which increases accounts payable, increases cash. Paying suppliers, which decreases accounts payable, decreases cash.

In General, when a net decrease in inventory for the period occurs, sales are greater than purchases; thus, the decrease must be added in computing cash flows from operations. When a net increase in inventory for the period occurs, sales are less than purchases; thus, the increase must be subtracted in computing cash flows from operations. When a net decrease in accounts payable for the period occurs, payments to suppliers are greater than new purchases; thus, the decrease must be subtracted in computing cash flows from operations. When a net increase in accounts payable for the period occurs, payments to suppliers are less than new purchases; thus, the increase must be added in computing cash flows from operations.