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How Inventory Related Costs Can Affect An Organization 's Profit And Loss Statement

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Three ways in which inventory-related costs can affect an organization’s profit and loss statement from one year to the next are inventory errors, inventory carrying costs, and inadequate inventory levels leading to customer service costs. According to Weygandt (2005), inventory is vital in determining the results of operations for a particular period.
Determining inventory quantities include taking physical inventories and determining the ownership of goods. Some ways that inventory errors occur are by miscounting during physical inventories, giving an incorrect money value to the inventory when received, or a goods receipt of inventory does not take place and ownership of the inventory is not achieved in the inventory management system. Inventory errors also occur when inventory purchased is in transit and not added to the inventory count. “Correct valuations and physical counts of inventory are important in determining a business’s profit or loss” (Bradford, n.d.). All errors will have an impact on the profit and loss statement from one year to the next. An error in ending inventory in the current period will have a reverse effect on net income of the next period. (Weygandt, 2005).
“There are two relevant financial aspects of inventory. First, the accounting measures of inventory stocks and flows affect both the income statement and balance sheet. Second, the level of inventory held affects the amount of capital needed as well as the income of the period” (Bierman &
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