Understanding Merchandise Inventory Management and Valuation Methods for Improved Business Performance

Merchandise Inventory

The goods a business has on hand for sale to customers- Owned by the company – In a ready foorm of sale to customers

Merchandise inventory is the collection of goods that a company intends to sell to its customers. It is classified as a current asset on the company’s balance sheet because it represents merchandise that is expected to be sold within a short period of time, usually within a year.

Merchandise inventory includes both finished goods, which are fully manufactured and ready for sale, as well as raw materials and work-in-progress inventory that has not yet been converted into finished goods.

Inventory management is critical for companies that rely on selling products to customers, as inventory costs can impact the company’s financial performance. Proper inventory management can help ensure that the company has the right amount of inventory to meet customer demand, without holding onto excess inventory that ties up cash flow and storage space.

Valuing merchandise inventory is also important in accounting. The most common method used is the cost of goods sold (COGS) method, which calculates the value of inventory as the cost of goods acquired or produced minus the cost of goods sold. This method assumes that the first goods purchased or produced are the first to be sold, also known as the first-in, first-out (FIFO) method. Other methods for valuing inventory include the last-in, first-out (LIFO) method and the weighted average cost method.

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