Question

You must reconcile the inventory account for Company A. You note that the general ledger balance does not equal the company sub-ledgers. Explain how you would try to reconcile the account using lower of cost or market, first-in-first-out concepts. What financial ratios would you use to determine if the inventory is being managed effectively? How would your findings affect the cash account?

Answer 1

Ans.: While carrying out Reconciliation of Inventory at Company A, if I found difference in General Ledger & Subledgers balances from that of Physical Stock on counting, than first thing is to search the reasons for differences. May be some inventory issued to particular job, accounted for in Main Ledger, while no posting at 'Sub Ledger" and even at physical site, the inventory couldnt reach and is on the way. So the first thing is to conclude the things to settle the Inventorys perfect position. IN FIFO concecpt, the Inventory are assumed that Last purchased inventory is lying in the stock at the end. The market rate or cost whichever is low can be taken to value the inventory from last bills available for purchase of inventory.

Inventory Turnover Ratio is the key for all organisation, which suggest the companys sound sales position as well as low inventory costs, low inventory carrying costs. Indirectly this ratio also suggest conversion of inventory into cash & resultantly liquidity position of company.

If the Inventory level of the Company is managed properly, the liquidity position of the company will depict soundness of company. Hence organisations Inventory level & Inventory Turnover ratio affects the Cash Account position of the corporation also.