Inventory Overview: Intro to Inventory Concepts (2350/Level 1)

Inventory Overview: Intro to Inventory Concepts (2350/Level 1)

Diane Gilson: Hi and welcome! This is Diane Gilson with today’s class – an Inventory Overview:  What everybody should know about inventory – at the very least.  So this is an introduction to basic inventory concepts.

We’ll talk about how we keep track of the ‘right stuff’.

• We’re going to cover some big concepts in QuickBooks. It’s not going to be, I’m warning you ahead of time this is a fairly short session.  We are not going to try to cover everything that you would want to know about inventory.  If you’re heavily involved in inventory, that will need to be a totally in-depth class on its own, and we will be offering that as well. This is just to give you a feel for what all is involved with inventory.
• So as we talk about Inventory Items, I’ll show you how to set up some basic Items and talk about related Items.
• We’ll be going through some basic buy/sell entries, what’s going on with QuickBooks behind the scenes in terms of posting, and
• We’ll touch on some related topics and issues to keep in mind.

So even though this isn’t a detailed inventory class, just a conceptual (primarily conceptual) overview, I think there will be enough here, if you haven’t been working in inventory, to get your mind thinking – and maybe even spinning a little bit.

QuickBooks and Enterprise have some excellent basic inventory functions.  Depending upon your company’s nature, inventory control and usage can get very, very complex.  So depending on the needs of your particular company, you may end up needing other more sophisticated inventory programs to plug in with your QuickBooks – and there is a variety of them out there. But, QuickBooks still has a lot of power on the inventory side, so we want to get a feel for what it can do.

QuickBooks inventory costing:  The way that [inventory] costs ultimately end up in your profit and loss is based on what they call average cost. So if you purchase a whole bunch of items at $1 apiece today, and tomorrow you purchased a bunch more at $1.50, and if you bought equal quantities when it’s time for it [QuickBooks] to move items out of inventory, it’s going to be pulling them out at the average cost that you paid. So if you bought equal amounts, then the easy answer is they’d be averaged at $1.25 each.  You bought half of them at $1 and half at $1.50, so that’s how it’s going to move the costs out [of inventory]. Now, of course, inventory goes up, and it goes down because you’re buying and you’re selling, and you’re paying different prices [for new inventory], and so it always adjusts what the average cost is – based on what’s in inventory at the time you purchase more inventory.

So if we had three things at $1 and we bought one hundred things at $1.25 then obviously our price would be much closer to $1.25.

It does not work and will not work on what’s called a LIFO which is a last in, first out cost basis, and if you went through accounting classes, you’d be familiar with LIFO.  The idea is that we cost based on the most recent price that we paid for inventory.  Or the FIFO basis which is first in first out, meaning that we would pull cost out of inventory based on the oldest things in our inventory that we bought first. So, first in is going to be first out.  One way to think about that is to picture a big stack of cereal boxes sitting on a shelf, and either you pull off the front of the shelf, or you pull off the back of the shelf.  LIFO is off the front of the shelf and FIFO would be off the back of the shelf. That’s kind of the way I think of it.  The average cost would mean that if we were selling three we’d pick out every other one or something along that line.  You get the idea!

Okay, so some really important concepts – and these are critical concepts in QuickBooks – are that if you’re going to use inventory, you have to always buy before you sell.  It just is logical.  It makes logical sense that you can’t sell something you don’t have, and if QuickBooks is looking at what you paid for something in order to recognize the cost at the time that you sell it, you have to have bought it before you sell it.  And if you sell before you buy, you end up with some really strange numbers on your books.  So I tell clients that if you’re going to buy and sell inventory…