Inventory policy

            The inventory policy institutes a process that is used for the recording, recognition and accountability of all the assets. The policy delineates principles and accounting standards that ensures that the inventory is appropriately controlled as well as cost analyzed while the losses and shortages are prevented from occurring. This therefore applies to all the inventory items that are inclusive of the raw materials, ongoing work, and consigned inventory as well as finished products. The inventory process is quite essential in the management of an organization’s finance system as the financial statements are used to diagnose some shortcomings or a profit margin. Therefore the inventory may positively or negatively impact the cash flow for both the profit and the nonprofit organization. For instance, too much of an inventory may be used by financiers to explain the excessive storage space which may result into spoilage of the stock hence increase in cash sale as the sales will be high due to the availability of products in the business. However, too little inventory may be perceived as a business loss and a reduction in the cash flow due to the loss of sales and customers that is attributed by shortage of stock. However, according to the various researches it is concluded that cash flows are determined by the current assets rather than the non-current assets (Larkin et al 2013).  Inventories vary largely in their liquidities and also the inventories of smaller businesses are liquidated more rapidly as compared to the larger businesses. However these large businesses such as the wholesalers have large and varied stock usually are in a position to offer credit and rent business shops in high rent charges localities thus they have a large inventory with larger sales volume but a smaller profit margin.

 

 

Reference

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Larkin, R. F., & DiTommaso, M. (2013). Wiley not-for-profit GAAP 2013: Interpretation and application of generally accepted accounting principles for not-for-profit organizations. Hoboken, N.J: John Wiley & Sons Inc.

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