Inventory sits at the core of any goods-based business. Whether it is from small shops to big factories if stock is managed well, it helps businesses to run smoothly. An inventory example makes it easier for you to know how inventory works in practice. And this includes the way in which businesses purchase, store, use and sell items. Inventory management examples, how to calculate inventory turnover, and a brief on perpetual inventory system example will be discussed in this article.
What is Inventory and Why is It Important?
Inventory refers to the assets owned and held by a company to be sold/manufactured in production. This encompasses raw materials, work-in-progress products, and finished products. Inventory becomes that thing that helps businesspeople know what they have, what they need to acquire, and what they need to sell. If inventory is not managed properly, your business can lose money. You could have positive cash earnings when customers wish to purchase products which you run out, or have too many stagnant products in stock that is not spinning.
Importance of Inventory
Any business that sells goods relies on inventory as the backbone of its sales. It manages supply and demand, smooth operations and customer satisfaction. Without the right inventory in place, businesses can suffer losses, delays, or unsatisfied customers.
- Guarantees Seamless Production and Sales: Inventory ensures availability of raw materials and finished goods when required. This ensures production continues flowing and prevents delays reaching customers.
- Helps Meet Customer Demand: Having the right levels of stock means businesses are able to fill customer orders immediately. This establishes trust and facilitates business growth.
- Reducing Stock-Outs and Overstocks: Effective inventory management ensures efficient usage of available goods while reducing wastage and stockpiling. Both scenarios can damage profits and customer service.
- Improves Cash Flow Management: The right amount of inventory uses less money. This allows businesses to better manage cash, and reinvest it elsewhere.
- Helps in Preparing Financial Statements Accurately: Inventory contributes to profit, cost of goods sold (COGS), and taxes. Maintaining accurate inventory ensures your books are accurate.
- Reduces Wastage and Theft: Also, the tracking ensures that any spoilage, damage or theft of items is on the lower side. It saves money and ensures product quality.
Inventory Example
There are 100 packets of rice in a grocery store. Every day they sell 10 packets. They reorder rice when only 20 packets are left. This is a basic example of inventory tracking.
Businesses use different inventory management systems to make sure they have the right products at the right time. These systems also help in recording purchases and sales.
Types of Inventory Example
Different types of inventories are essential for the ways of working of the business. Examples learned help gain a better understanding of them. But there are several different kinds of inventory in business. And each served a specific purpose in how things were produced, stored, or sold. Understanding these with examples allows better stock management.
Raw Material Inventory Example
The raw materials are the fundamental raw materials for the production of the finished product. Raw material inventory consists of the basic products used to create finished products. Before production begins, these are the fundamentals a business needs. Now let’s see how this works with a simple example.
Example:
A furniture maker keeps wood, glue and nails. These are raw materials for making tables and chairs.
Work-In-Progress Inventory Example
This includes partially manufactured items. Work-in-progress (WIP) inventory: Items that are partially manufactured but not yet complete. They are also in the middle stage of production. Let me give you one example to make it clear.
Example:
Shutter ready items in the shutter work shop are works in progress. They’re not quite ready to be sold.
Finished Goods Inventory Example
Products that are fully manufactured and ready for sale fall under finished goods inventory. These are waiting to be shipped to customers. Now, let’s follow a simple example to see how it works. Finished goods are products that are ready for sale.
An example of Finished goods inventory:
Fiction: A bakery bakes 100 loaves of bread each day. These particular breads are finished goods. They are kept and sold throughout this day.
Inventory Management Examples in Different Businesses
Every type of business uses inventory management to track goods, prevent losses, and facilitate smooth sales. No matter small shop or large company, stocked inventory management saves both time and money. Here are some real-life inventory management examples from various businesses showing how they manage their inventory. This section discusses actual business scenarios where inventory is central. It is a fact that every business requires a robust system to keep track of its inventory.
Small Retail Shop Inventory Example
A kirana shop is a grocery store that stocks oil, rice, flour, snacks, etc. The shopkeeper keeps a notebook to jot down what is brought in and what is taken out. When the stock of rice dips below 10 kg, he orders again from his supplier. This is a basic inventory management example.
E-Commerce Inventory Example
So let’s say there is an online shoe store that sells 500 shoes a day. It tracks remaining sizes and styles in the warehouse using software. The software issues a reorder alert when a shoe style has less than 10 pieces. Example of an inventory management system.
Factory Inventory Example
A shirt factory storage where the fabrics, buttons, threads, half-stitched shirts and finished shirts are stored all have their own separate areas. It employs barcode systems, as well as warehouse management software, to track this intricate process.
Inventory Control Example: How To Maintain Stock Accuracy?
Inventory control is the process of ensuring the quantity of items you hold in stock is where it should be in which nothing is missing, nothing is damaged, nothing is overstocked. It saves businesses from wastages, saves money, and offers them just the right amount of goods at the perfect time. To better understand how this works in daily business, let’s look at a real inventory control example. Inventory management is the process of ensuring that there are goods in the correct quantity at all times. This can help to avoid losses and stockouts.
Real Inventory Control Example
A phone shop sells 50 phones each week. Stock is checked by the owner every Friday. He orders more if only 20 phones remain. He also looks for damaged or expired products. This helps prevent both overstock and stockouts. It is also very useful for saving time and money in retail stores, supermarkets, and even in warehouses.
There are a few things that define good inventory control:
- Regular stock checks
- Setting minimum stock levels
- Setting alerts and reorder points
Perpetual Inventory System Example – Continuous Tracking
Perpetual inventory system periodically updates the stock accounting system with each sale or purchase. It tells you the correct and up-to-date levels of stock. Alright, let us see how it works with a simple perpetual inventory system example. This is how the stock levels are updated in real-time after every sale or purchase. In this way, the exact amount of inventories can always be known.
Example of Perpetual Inventory System
A pharmacy selling medicine via a billing system. As each drug is sold, the system decreases that item’s quantity. An example of a perpetual inventory system
Advantages:
- You never have to check what you have in stock
- Daily physical stock count is not required
- Helpful in hyper-competitive industries
This system is usually used by retailers and e-commerce stores.
Weighted Average Inventory Method Example
Using the weighted average inventory method enables companies to arrive at the average of cost items purchased at varying prices. This approach helps you when the product prices are frequently changing. It simplifies accounting and assigns a fair cost value for each item. To better understand it, let us look at the weighted average inventory method example. This approach calculates the average cost of the inventory items when there is a lot of fluctuation in prices.
Weighted Average Inventory Method Example
- A company purchases 100 pens at the cost of ₹10 and 100 at ₹20.
- Total Cost = ₹1000 + ₹2000 = ₹3000
- Total pens = 200
- Average cost of each pen = ₹3000 ÷ 200 = ₹15
So each time they sell a pen, they use ₹15 cost. This keeps profit easy to track. This is a good approach when prices fluctuate frequently.
Inventory Turnover Ratio Example: Find The Speed at Which Products are Sold?
A period is often defined as a month, a quarter, or a year, during which the inventory turnover ratio indicates how often a company sells and replaces its stock. It measures speed of sales and stock turnover. Let me give you an inventory turnover ratio example to explain it in simple terms. Inventory turnover is the ratio that shows how many times a business sells and replaces its inventory in a time period.
Inventory Turnover Ratio Example
For example, if a business makes sales of ₹1,00,000, and average inventory ₹20,000.
The formula for inventory turnover ratio is:
Inventory turnover ratio = Sales ÷ Average Inventory
= 1,00,000 ÷ 20,000 = 5
This means that the business sold and replaced its inventory five times in that time frame. A high ratio indicates items are moving quickly. A high ratio means that goods are sitting too long. This ratio gives an idea of what’s moving and what’s not.
Inventory in Tally with Example – Accounting Made Easy
Tally is a popular software in India used for accounting and inventory tracking. It helps businesses record purchases, sales, and stock levels. Let’s see an inventory in Tally with example to understand how it works.
Inventory in Tally with Example
For example when mobile shop buys 100 phones, it enters purchase data in Tally. Number decreases automatically in Tally when phones are sold. Using inventory in Tally and that too with example which also make sure that even a small shopkeeper can know his stock.
Tally provides complete reports such as:
- Stock summary
- Reorder levels
- Sales and purchase data
Inventory Vouchers in Tally with Example
Tally Tracks Inventory Movements Using Vouchers Tally inventory vouchers allow you to record every movement of stock — purchases, sales, and transfers. The vouchers record the inventory in simple and precise form. Let’s look at inventory vouchers in Tally with example to learn how they work.
Inventory Vouchers in Tally with Example
- Purchase Voucher: When goods are purchased
- Sales Voucher: When goods are sold
- Knocking It Off: Posted items are also returned
- Sent to Customer: Delivery Note
- Stock Journal: For internal transfers
Example: Sale of 10 phones in a shop recorded through Sales Voucher. Tally automatically updates this in inventory and accounts. This is an example of inventory in Tally vouchers.
Ansible Playbook Inventory Example- For IT
Ansible is a server and system management tool for IT teams. You manage a group of machines using inventory files. This is specifically for IT and in Ansible, you manage groups of servers/systems using inventory files. These files allow us to execute tasks on multiple machines at the same time. Let us see a real use of ansible playbook inventory example.
Ansible Playbook Inventory Example
For example: A company wants to use Ansible to upgrade their software running on 10 servers. The playbook uses an inventory file with the IP addresses of all servers. This is useful for automating tasks across multiple machines. This is a very good usage of inventory in the IT sector. It’s not the same as product stock, but it’s still considered a part of inventory management.
Relevance to ACCA Syllabus
Inventory and Financial Reporting (FR) and Management Accounting (MA) in ACCA involves methods of valuing, classifying, and controlling inventory (e.g., FIFO, weighted average) & Computerized Accounting: Tally Whether for financial analysis or for audit purposes, grasping turnover ratios and cost flow is essential.
Inventory Example ACCA Questions
Q1: What is an example of a raw material inventory?
A. Store-purchased jeans from a garment shop
B. Buttons and fabric in a tailor’s shop
C. Delivered shirts to customers
D. Leftover inventory from last year
Answer: B
Q2: What is inventory turnover ratio?
A. Cost of inventory per unit
B. Value of unsold stock
C. The rate at which inventory moves
D. Quantity of expired stock
Answer: C
Q3: What is the method that evenly distributes total inventory cost across all items?
A. FIFO
B. LIFO
C. Specific Identification
D. Weighted Average
Answer: D
Q4: Which voucher is used for recording goods returned to supplier in Tally?
A. Purchase Voucher
B. Rejection Out Voucher
C. Sales Voucher
D. Stock Journal Voucher
Answer: B
Q5: What type of inventory consists of cars available for sale?
A. Work-in-progress
B. Raw Materials
C. Maintenance Supplies
D. Finished Goods
Answer: D
Relevance to US CMA Syllabus
Inventory falls under Part 1: Financial Planning, Performance & Analytics. Presenting US CMA study material related to inventory valuation, costing (people question including weighted average inventory method example) and inventory turnover ratio example to evaluate performance. It is gaining control techniques and system usage like perpetual inventory system example.
Inventory Example US CMA Questions
Q1: What is an example of a perpetual inventory system in a retail shop?
A. Monthly manual stock check
B. Stock updates in real time with barcode system
C. Yearend CLOSING Stock estimated
D. Quarterly inventory check by the manager
Answer: B
Q2: Which inventory method is ideal for stable prices?
A. LIFO
B. Weighted Average
C. FIFO
D. Specific Identification
Answer: B
Q3: In manufacturing, is it half-built cars that are the correct example of inventory?
A. Raw Materials
B. Finished Goods
C. Work-in-progress
D. Machinery
Answer: C
Q4: Which of these is an inventory control example?
A. Ignoring reorder levels
B. Stocktaking every year
C. Establishing minimum and maximum levels
D. Not checking quantity before selling a product
Answer: C
Q5: Absorption costing does not consider which cost as a part of inventory?
A. Factory rent
B. Direct labor
C. Sales commission
D. Raw materials
Answer: C
Relevance to US CPA Syllabus
In US CPA, Its core in FAR (Financial Accounting & Reporting) and AUD (Auditing & Attestation). Focusing on specific topics like inventory valuation, FIFO/LIFO, turnover ratios, perpetual vs. periodic systems, etc. Examples on inventory prepare students for financial audits in the real-world as well as GAAP-(Generally Accepted Accounting Principles) based reporting.
Inventory Example US CPA Questions
Q1: What inventory for your example is considered “goods held for resale”?
A. Machinery in production
B. Customer returns
C. Packed phones in a store
D. Damaged goods for disposal
Answer: C
Q2: When does inventory updated in a periodic inventory system?
A. With every single transaction
B. Daily
C. At the close of the accounting period
D. Every time an item is sold
Answer: C
Q3: Which of the following is true regarding FIFO inventory during inflation?
A. Understates profits
B. Reports lower cost of ending inventory
C. Shows higher net income
D. Uses most recent costs for the cost of goods sold
Answer: C
Q4: Which of the following is NOT included in inventory valuation according to GAAP?
A. Cost to deliver goods to site
B. Storage costs before sale
C. Purchase cost
D. Customs duties
Answer: B
Q5: What are the types of inventory that are part of current assets?
A. Land held for resale
B. Finished goods
C. Office computers
D. Intangible assets
Answer: B
Relevance to CFA Syllabus
Inventory affects financial statement analysis, profit margins, and working capital. CFA candidates must analyze inventory turnover, inventory methods, and impact on cash flow and valuation metrics. This is covered in Level 1 under Financial Reporting & Analysis.
Inventory Example CFA Questions
Q1: What impact does an increase in prices have on inventory under LIFO?
A. Higher net income
B. Lower cost of goods sold
C. Higher cost of goods sold
D. Higher inventory value
Answer: C
Q2: Low inventory turnover ratio signifies:
A. High demand for products
B. Stock is selling quickly
C. Overstocking or slow sales
D. Low inventory balance
Answer: C
Q3: What inventory method smooths out price movements?
A. FIFO
B. Specific Identification
C. LIFO
D. Weighted Average
Answer: D
Q4: Which of the following best describes inventory control example?
A. Ignoring purchase dates
B. Manual estimates of inventory
C. Regular monitoring and setting reorder points
D. Only when audits are done
Answer: C
Q5: Is the cash conversion cycle only affected by one inventory example?
A. Expired items
B. Raw materials bought
C. Damaged goods
D. Charity stock
Answer: B
