Reporting and analysing inventory at North veterinary medicine limited company

LIFO reserve...13 Chapter 2...15 REPORTING AND ANALYSING INVENTORY AT NORTH VETERINARY MEDICINE LIMITED COMPANY...15 2.1.. Table 1.1: Example of inventory costing at Houston Electronics.

Chapter 1 2

LITTERRATURE REVIEW ON REPORTING AND ANALYSING INVENTORY 2

1.1 Definition and classification of inventory 2

1.1.1 Definition of inventory 2

1.1.2 Classification of inventory 3

1.2 Determining inventory quantities 4

1.2.1 Taking a physical inventory 4

1.2.2 Determining ownership of goods 4

1.3 Inventory costing 4

1.3.1 Purchases of merchandise 5

1.3.2 Sales of merchandise 6

1.4 Reporting inventory 11

1.4.1 Income Statement effects 11

1.4.2 Balance Sheet effects 12

1.4.3 Tax effects 12

1.5 Analysis of inventory 13

1.5.1 Inventory turnover ratio 13

1.5.2 LIFO reserve 13

Chapter 2 15

REPORTING AND ANALYSING INVENTORY AT NORTH VETERINARY MEDICINE LIMITED COMPANY 15

2.1 Generals of North veterinary medicine limited company 15

2.1.1 Formation and development 15

2.1.2 Field of business 16

2.1.3 Manufactoring process 16

2.1.4 Organisation structure 18

2.1.5 Businness performance 19

2.2 Reporting and analysing inventory at the company 20

2.2.1 Documents circulation 20

2.2.2 Inventory costing 21

2.2.3 Reporting inventory 23

2.2.4 Analysis of inventory 30

2.3 Findings 30

2.3.1 Strengths 30

RECOMMENDATIONS TO IMPROVE REPORTING AND ANALYSING INVENTORY

AT NORTH VETERINARY MEDICINE LIMITED COMPANY 32

3.1 Development plan of North veterinary medicine limited company 32

3.1.1 Business development plan 33

3.1.2 Objectives of developing the activity of reporting and analysing inventory34 3.2 Implications proposed to the company to improve reporting and analysing inventory 35

3.2.1 Inventory check book 35

3.2.2 Provision for devaluation of stocks 37

3.2.3 Establish the account “Goods in transit” 37

3.2.4 Apply Accounting softwares 38

3.2.5 Improve documents movement process 38

Table 1.1: Example of inventory costing at Houston Electronics 6

Table 1.2: FIFO cost of goods available for sale at Houston Electronics 7

Table 1.3: FIFO ending inventory at Houston Electronics 7

Table 1.4: FIFO cost of goods sold at Houston Electronics 7

Table 1.5: LIFO cost of goods available for sale at Houston Electronics 8

Table 1.6: LIFO ending inventory at Houston Electronics 8

Table 1.7: LIFO cost of goods sold at Houston Electronics 9

Table 1.8: Average cost of goods available for sale at Houston Electronics 9

Table 1.9: Average ending inventory at Houston Electronics 10

Table 1.10: Average cost of goods sold at Houston Electronics 10

Table 1.11: Comparison of three assumed cost methods in income statement at Houston Electronics 11

Diagram 2.1: Drugs manufacturing process at North veterinary medicine Co.,Ltd 16

Diagram 2.2: Organisational structure of North veterinary medicine Co.,Ltd 17

Table 2.1: Income statement of the year end 2011 and 2012 of North veterinary medicine Co.,Ltd 18

Diagram 2.3: Documents circulation process at North veterinary medicine Co.,Ltd 19

Table 2.2: Account Cost of goods sold at North veterinary medicine Co.,Ltd 21

Table 2.3: Stock card of the inventory Sulpha dimidin at North veterinary medicine Co.,Ltd .22

Table 2.4: Inwards notes of 30 th November 2012 at North veterinary medicine Co.,Ltd 23

Table 2.5: Subcidiary ledger of the month of November 2012 at North veterinary medicine Co.,Ltd 24

Table 2.6: Stock movement summary of the month of November 2012 at North veterinary medicine Co.,Ltd 25

Table 2.7: Liquidation record of the year end 2012 at North veterinary medicine Co.,Ltd.28 Table2.8: Inventory turnover ratio and Days in inventory of 2011-2013 period at North veterinary medicine Co.,Ltd 29

Table 3.1 Stock movement target of North veterinary medicine Co.,Ltd in 2015 32

Table 3.2: Financial plan of North veterinary medicine Co.,Ltd in 2015 33

Table 3.3: Purposed Inventory check book at North veterinary medicine Co.,Ltd 35

Figure 3.1: Quickuse accounting software 37

Table 3.4 Proposed documents recept note at North veterinary medicine Co.,Ltd 38

One of major goals in managing a business is to store the least amount of inventorywhile maintaining specific operating requirements Ideally, the inventory controlallows the business to supply needs in regards to production or to the customer atthe precise moment needed, at the minimal price Successful inventory controlkeeps waste and surplus at a minimum and efficiently handles storage, productionand distribution of inventory That is the reason why, in order for business andsupply chains to run effectively and efficiently they must meet all the listedrequirements for effective inventory management Some of the main concerns arethe level of customer service and the cost of ordering, storing, and carryinginventory Therefore, inventory must be managed wisely

Reporting and analysing inventory plays a vital role in managing a company'sinventory Basically, its function is to monitor the net worth of goods and maintainaccurate records at all times In addition, this process helps the company todetermine its profitability and ensure accurate financial statements through specifictasks including supervising inventory counts, inputting inventory data, evaluatingreports, checking discrepancies and presenting findings

As a manufacturer and retailer, the operation of North veterinary medicine limitedcompany need to be precise and effectiveness in inventory management Withexpectation to study this subject, I have spent 5 weeks working as an intern inAccounting department of North veterinary medicine limited company

Consequently, I chose the topic: ”Reporting and analysing inventory at North veterinary medicine limited company” for my internship report

The report is divided into three main chapters:

 Chapter 1: Literature review on Reporting and analysing inventory

 Chapter 2: Reporting and analysing inventory at North veterinary medicine

limited company

 Chapter 3: Recommendations to improve reporting and analysing inventory

at North veterinary medicine limited company

I would like to thank the company's director, the staff and my tutor, Mrs Le ThiPhuong Dung for helping me to finish this report

is tying up dollars that can be better used in other areas It also risks obsolescenceand spoilage Successful businesses keep their inventory turns high, but also keeptheir service level at or above the industry standard.”

(Source: InventoryDefinition.com)

“The value of materials and goods held by an organisation to support production(raw materials, subassemblies, work in process), support activities (repair,maintenance, consumables), or for sale or customer service (merchandise, finishedgoods, spare parts)

Inventory is often the largest item in the current assets category, and must beaccurately counted and valued at the end of each accounting period to determine

a company's profit or loss Organizations whose inventory items have a large unitcost generally keep a day to day record of changes in inventory (called perpetualinventory method) to ensure accurate and on-going control Organizations withinventory items of small unit cost generally update their inventory records at theend of an accounting period or when financial statements are prepared(called periodic inventory method) GAAP require that inventory should be valued

on the basis of either its cost price or its current market price whichever is lower of

the two to prevent overstating of assets and earning due to sharp increase in theinventory's value in inflationary periods The optimum level of inventory for anorganization is determined by inventory analysis Called also stock in trade, orjust stock.”

(Source: BusinessDictionary.com)

1.1.2 Classification of inventory

How a company classifies its inventory depends on whether the firm is amerchandiser or a manufacturer In a merchandiser, inventory consists of manydifferent items but with two common characterisitics:

 Owned by the company

 In form ready for sale to customers

Thus, merchandisers need only one inventory classification – merchandise inventory – to describe the many different items that make up the total inventory.

In a manufacturing company, some inventory may not yet be ready for sale As aresult, manufacturers classify inventory into three main categories:

 Finished goods inventory: manufactured items that are completed and readyfor sale

 Work in process: the portion of manufactured inventory that has begun theproduction process but is not yet complete

 Raw materials: the basic goods that will be used in production but have notyet been placed into production

1.2 Determining inventory quantities

No matter which inventory system they are using, all companies need to determineinventory quantities at the end of the accounting period The process of determininginventory quantities involves two steps

1.2.1 Taking a physical inventory

This process involves activities such as actually counting, weighing, measuringeach kind of inventory on hand In many companies, taking an inventory is aformidable task An inventory count is generally more accurate when a limited

number of goods are being sold or received during the counting Consequently,companies often take inventory when the business is closed or slow

1.2.2 Determining ownership of goods

One challenge in determining inventory quantities is making sure the companyowns the inventory To determine ownership of goods, two special kinds of goodsmust be considered:

 Goods in transit: goods purchased which have not yet been received or goodssold which have not yet been delivered

 Consigned goods: goods hold of other parties to sale without takingownership

1.3.1 Purchases of merchandise

Companies normally record purchases when they receive the goods from the seller.Every purchase should be supported by business documents that provide writtenevidence of the transaction – a purchase invoice – which indicates the total purchaseprice and other relevant information However, the purchaser does not prepare aseparate purchase invoice Instead, the purchaser uses a copy of the sales invoicesent by the seller

Under the perpetual inventory system, companies record purchases of merchandise

in the Inventory account

 Purchase returns and allowances

A purchaser may be dissatisfied with the merchandise received because the goodsare damaged or defective, or inferior quality, or do not meet the purchaser’sspecifications In such cases, the purchaser may return the goods to the sellerforcredit or cash refund This is known as a Purchase return Alternatively, thepurchaser may choose to keep the merchandise if the seller is willing to grant areduction of the purchase price This is known as a Purchase allowance

 Purchase discounts

The credit terms of a purchase on account may permit the buyer to claim a cashdiscount for prompt payment This is called a Purchase discount, which offersadvantages to both parties: the buyer saves money and the seller is able to shortenthe operating cycle by converting accounts receivable into cash earlier

1.3.2 Sales of merchandise

Inventory is accounted for at cost Cost includes all expenditures necessary toacquire goods and place them in condition ready for sale After having determinedthe quantity of inventory, company applies unit costs to the quantity to determinethe total cost of inventory and of cost of good sold According to different times andprices of purchase and sale, we have alternative inventory costing methods

a Specific identification

Specific identification requires the company to keep records of the original cost ofeach individual inventory item This method used to be only possible whencompany sold a limited variety of high-unit-cost items that could be identifiedclearly from the time of purchase through the time of sale Today, with bar coding,electronic product codes, radio frequency identification, it is possible to nearly anytype of product However, this practice is still relatively rare

b Cost flow assumptions

These methods differ from specific identification in that they assume flows of coststhat may be unrelated to the actual physical flow of goods To demonstrate thesemethods, we use a periodic inventory system Firstly, we know the cost of goodssold formula in periodic inventory system as:

(Beginning inventory + Purchases) – Ending inventory = Cost of goods sold

Table 1.1: Example of inventory costing at Houston Electronics

Houston Electronics

Unit:USD

Total units available for sale 1,000 $12,000

Units in ending inventory 450

(Source: Kimmel ; Weygandt ; Kieso, 2010)

We will in turn apply three assumed cost flow methods:

 First-In, First-Out (FIFO):

The FIFO method assumes that the earliest goods purchased are the first to be sold.FIFO often parallels the actual physical flow of merchandise because it generally isgood business practice to sell the oldest units first Under this method, the costs ofthe earliest goods purchased are the first to be recognised in determining cost ofgoods sold, regardless which units were actually sold

Table 1.2: FIFO cost of goods available for sale at Houston Electronics

Cost of goods available for sale

Unit:USD

(Source: Kimmel ; Weygandt ; Kieso, 2010)

Table 1.3: FIFO ending inventory at Houston Electronics

(Source: Kimmel ; Weygandt ; Kieso, 2010)

Table 1.4: FIFO cost of goods sold at Houston Electronics

Cost of goods sold

Unit:USDCost of goods available for sale $12,000

(Source: Kimmel ; Weygandt ; Kieso, 2010)

Under FIFO, since it assumed that the first purchase were the first sell, endinginventory is based on the prices of the most recent units purchased Therefore,company determines the cost of ending inventory by taking the unit cost of the mostrecent purchase and working backward untill all units of inventory have beencosted

 Last-In, First-Out (LIFO):

The LIFO method assumes that the latest goods purchased are the first to be sold.LIFO usually coincides with the actual physical flow of inventory

Table 1.5: LIFO cost of goods available for sale at Houston Electronics

Cost of goods available for sale

Unit:USD

(Source: Kimmel ; Weygandt ; Kieso, 2010)

Table 1.6: LIFO ending inventory at Houston Electronics

(Source: Kimmel ; Weygandt ; Kieso, 2010)

Table 1.7: LIFO cost of goods sold at Houston Electronics

Cost of goods sold

Unit:USDCost of goods available for sale $12,000

(Source: Kimmel ; Weygandt ; Kieso, 2010)Under LIFO, since it assumed that the first sell were the most recent purchase,ending inventory is based on the prices of the oldest units purchased Therefore,company obtains the cost of ending inventory by taking the unit cost of the earliestgoods available for sale and working forward untill all units of inventory have beencosted

= Weighted-average

unit cost

The company then applies the weighted-average unit cost to the units on hand todetermine the cost of ending inventory

Table 1.8: Average cost of goods available for sale at Houston Electronics

Cost of goods available for sale

Unit:USD

(Source: Kimmel ; Weygandt ; Kieso, 2010)

Table 1.9: Average ending inventory at Houston Electronics

(Source: Kimmel ; Weygandt ; Kieso, 2010)

Table 1.10: Average cost of goods sold at Houston Electronics

Cost of goods sold

Unit:USDCost of goods available for sale $12,000

(Source: Kimmel ; Weygandt ; Kieso, 2010)

1.4 Reporting inventory

All of the three assumed cost flow methods are acceptable widely Therefore, thereason of choosing to adopt which of them depends on company’s goals Generally,

it involves these following factors

1.4.1 Income Statement effects

Table 1.11: Comparison of three assumed cost methods in income statement at Houston Electronics

Houston Electronics Income Statements

Cost of goods available for sale 12,000 12,000 12,000

(Source: Kimmel ; Weygandt ; Kieso, 2010)

We can see clearly that the cost of goods available for sale is the same under threeinventory cost flow methods However, the ending inventory and the cost of goods

sold are different This difference is due to the unit cost that company allocated tocost of goods sold and ending inventory, which results in a corresponding difference

in income before taxes For Maria Electronics, it is a $800 gap between FIFO andLIFO cost of goods sold

In most instances, prices rise over time according to inflation As a result, FIFOproduces the highest net income because the lower unit costs of the first unitspurchased are matched against revenues, LIFO reports the lowest and Average-costfalls in the middle

To management, higher net income is an advantage It causes external users to viewthe company more favorably Therefore, companies tend to prefer FIFO for highernet income

1.4.2 Balance Sheet effects

A major advantage of FIFO is that along with inflation, costs allocated to endinginventory will approximate their current costs For Maria Electronics, 400 of the

450 units in the ending inventory are costed at the higher Nov 27 unit cost of $13.Conversely with LIFO method when the costs allocated to ending inventory may beunderstated in terms of current cost and it becomes greater over time

1.4.3 Tax effects

We have seen that both inventory on the balance sheet and net income on theincome statement are higher with FIFO in period of inflation Yet, many companiesuse LIFO The reason is that LIFO resultes in the lowest income taxes, because oflower net income In the case of Maria Electronics, income taxes are $750 underLIFO compared to $990 of FIFO

effectively, is anticipating increased sales in the near future (such as during theholidays), or has an inefficient purchasing department In contrast, declininginventories may signal that the company is selling more than it expected, has abacklog, is experiencing a bloackage in its supply chain, is expecting lower sales, or

is becoming more efficient in its purchasing activity

For trade companies, managing inventory levels can be one of the most criticaltasks Having too much inventory on hand costs the company in storage, interest…But having too little inventory on hand results in lost sales That is the reason whyevaluating inventory levels is concerned here

1.5.1 Inventory turnover ratio

Inventory turnover ratio = Cost of goods sold ÷ Average inventory

The inventory turnover ratio indicates how quickly company sells its goods – thenumber of times the average inventory “turns over” during the year

Days in inventory = 365 ÷ Inventory turnover ratio

Inventory turnover can be divided into 365 days to compute Days in inventory ,which indicates the average number of days inventory is held

High inventory turnover – low Days in inventory – indicates that company hasminimal funds tied up in inventory, which means it has a minimal amount ofinventory on hand at one time Although minimising the funds tied up in inventory

is efficient, too high an inventory turnover ratio may indicate that company is losingsales opportunities because of inventory shortage Thus, management shouldmonitor this ratio to achieve the best balance of inventory levels

1.5.2 LIFO reserve

Use of different inventory cost flow assumptions complicates comparation ofcompanies’ results Therefore, companies using LIFO are required to report thedifference between inventory reported using LIFO and FIFO This amount is calledLIFO reserve, which enables to make adjustments

Because there are several ways to account for inventory and because someindustries require more inventory than others, comparison of inventories isgenerally most meaningful among companies within the same industry using the

same inventory accounting methods, and the definition of a “high” or “low”inventory level should be made within this context.

Chapter 2

REPORTING AND ANALYSING INVENTORY AT NORTH VETERINARY MEDICINE LIMITED COMPANY

2.1 Generals of North veterinary medicine limited company

2.1.1 Formation and development

 Company name: North veterinary medicine limited company

 Abbreviation: North veterinary medicine Co., Ltd

 Head office: No107 A12 Phuong Mai street, Dong Da district, Hanoi

 Phone: 043.6649.342 Fax: 043.8643.332

 Email: thuymienbac@gmail.com

North veterinary medicine limited company was founded by Mr Director PhamNgan, according to the certificate of business register No 0102006734 authorised byThe service of planning and investment of Hanoi city on 18/10/2002 The companydoes business in veterinary medicine field, with a charter capital of 1 billion VND.Specifically, the company operates in:

 Researching, manufacturing, selling veterinary drugs and materials

 Consulting, receiving, transfering technology in veterinary and breeding

 Selling ingredients and materials to manufacturing veterinary drugs and feeds

 Trading agency and consignment

By 2012 the company has over 100 authorized products produced and circulated inthe market, the company always aim to bring the highest return for the people in the

form of seminars, technical consultancy, supply veterinary medicinal productswhich are rich in variety, packaging specifications with the highest quality and mostreasonable price.

2.1.2 Field of business

In the present, the company manufactures over 30 veterinary products such asantibiotic, vitamin, premix, enzyme, antiphlogistic… with effect to prevent and curedeases of cattles, domestic fowls, also foster the growth of them to reach farmingtargets

2.1.3 Manufactoring process

The company purchases pre-processing ingredients, then combines them intospecific medications Therefore, the manufacturing process of the company includesonly few automatic stages, the rest is handwork The company has two mainproducts: liquid drugs and powder drugs

a Liquid drugs manufacturing process (7 stages)

 Stage 1: Preparation of materials, including main ingredients and dried,sterilised bottles

 Stage 2: Dispensation, including main ingredients and solvent concoction

 Stage 3: Filtration

 Stage 4: Dividing filtrated drugs into bottles through automatic divider

 Stage 5: Bottles, boxes, bathes labelling

 Stage 6: Products quality testing (KCS)

 Stage 7: Warehousing

b Powder drugs manufacturing process (5 stages)

 Stage 1: Preparation of materials, including main ingredients, subsidiaryingredients and packages

 Stage 2: Dispensation, including concoction of each element and excipients

 Stage 3: Dividing dispensed drugs through automatic divider, sealing packs,packaging into bags

 Stage 4: Products quality testing (KCS)

 Stage 5: Warehousing

Diagram 2.1: Drugs manufacturing process at North veterinary medicine Co.,Ltd

(Source: North veterinary medicine Co.,Ltd documents)

Inspect drugs, excipients

Treated bottles

Divide dose, bottle, stopper

Label and package

Test product

Warehouse

2.1.4 Organisation structure

Diagram 2.2: Organisational structure of North veterinary medicine Co.,Ltd

(Source: North veterinary medicine Co.,Ltd documents)

 Director: Managing and operating all activities of the company, being legalrepresentative of the company, being legally responsible for all operationsand results of the company

 Accounting and Finance department: Proffestionally managing finance andaccounting issues of the company, including supervising businessperformances, observance of legislation, providence of economic documents

 Logistics department: Ensuring shipments to materials suppliance forproduction, products preservation and shipments of products to merchandise

 Quality control department (KCS): Inspecting receipted materials anddeliveried products, ensuring quality requirements of merchandised products

 Factories: Reasonably arranging and managing human resource placement,executing production along with technological process:

- Factory 1: Production of powder drugs such as Anticoli, Ampicoli Oral,Mequin, Coccicid, N-Colidin…

- Factory 2: Production of liquid drugs such as Ticol, Neocil, Dolin LA, Fluquin, N-Enxin…

Quality control department

Factory 1 Factory 2

Table 2.1: Income statement of the year end 2011 and 2012 of North veterinary medicine Co.,Ltd

North veterinary medicine company

Sales discounts

Net sales 3,230.588 3,598.657 368.068 11.39

Cost of goods sold 1,499.184 1,811.1 311.915 20.8

Gross profit 1,731.404 1,787.557 56.152 3.24 Operating expenses 783.357 882.393 99.035 12.64Income from operations 948.047 905.164 -42.882 -4.52

Other revenues and gains

Interest revenue 822.206 5.376 4.554 553.9

Other expenses and losses

Income before taxes 909.869 643.04 266.828 29.3

- Sales revenue in 2012 increases 368,068,800 VND (11.39%) compared towhich in 2011

- Interest revenue rises 4,554,294 VND (553.9%)

- Income before taxes goes up an amount of 266,828,396 VND (29.3%)

As all operating indicators (revenue, profit, income) increase, the company wouldhave great hinge to higher level of development in the future

2.2 Reporting and analysing inventory at the company

2.2.1 Documents circulation

Diagram 2.3: Documents circulation process at North veterinary medicine Co.,Ltd

Daily noteMonthly or period noteChecking, comparation(Source: North veterinary medicine Co.,Ltd documents)

As a manufacturer, inventory of North veterinary medicine limited company isclassified into three categories: Finished goods, Work in process and Raw materialswhich including items such as: labels, aluminous bags, glass bottles, carton baths,drugs ingredients…