Inventory systems contain detailed records of the products, quantities and stock locations of the company's assets. The primary purpose of an inventory system is to keep an accurate record of stockroom supplies. The reasons to maintain accurate inventory records include financial accounting, customer order fulfillment, stock replenishment and maintaining the ability to locate specific an item.
Inventory on the Balance Sheet
The primary reason to maintain an inventory system is to keep accurate records of the company's assets. For any company, inventory represents an investment. The balance of that investment is reported on the balance sheet. To adhere to government standards for accuracy of financial reporting, companies are required to ensure that inventory balances reported on the balance sheet reflect the true value of products in stock.
Inventory Accuracy for Stock Replenishment
By keeping an accurate record of stock on hand, the store's inventory replenishment system will maintain desired inventory levels. As shoes are purchased and scanned out of stock, the inventory replenishment system places re-stocking orders from the distribution center. When inventory is not accurate, the inventory system may errantly believe that stock is on hand. Such inventory inaccuracy causes the inventory control system to not re-order needed supplies and may result in stock-outs and lost sales.
Inventory to Support Sales
Companies invest in inventory to make product readily available to meet customer demand. Imagine shopping at a shoe store that did not have any shoes in stock. Customers would leave the store, sales would fall and the store would close. Through proper maintenance of the inventory system, the store keeps accurate inventory records, which in turn keep the shelves stocked with the latest styles and sizes customers need. To ensure the inventory system is accurate, the staff must properly transact all inventory receipts, returns and sales in the inventory system.
Maintaining accurate inventory locations within the inventory system allows employees to quickly go to a specified storage bin to find the product needed. Imagine in the backroom of the shoe store there are 10,000 pairs of shoes. If the inventory is not stored and accounted for accurately, how could an employee find a specific style and size of shoe for a customer? Organizing and maintaining accurate records of the product, quantity on hand and storage location allows employees to quickly access inventory.
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- Masao Nakamura, Sadao Sakakibara and Roger Schroeder. "Adoption of Just-in-Time Manufacturing Methods at U.S.- and Japanese-Owned Plants: Some Empirical Evidence," pages 230-231. IEEE Transactions on Engineering Management, 1988.
- Electronic Code of Federal Regulations. "Regulation S-X, 17 CFR Part 210: Sec. 210.5-02 Balance sheets." Accessed Aug. 1, 2020.