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Inventories - 3 Video Lecture | Crash Course for CA Foundation

FAQs on Inventories - 3 Video Lecture - Crash Course for CA Foundation

1. What are the different methods of inventory valuation used in accounting?

Ans. The main methods of inventory valuation used in accounting are First-In, First-Out (FIFO), Last-In, First-Out (LIFO), and Weighted Average Cost. FIFO assumes that the oldest inventory items are sold first, LIFO assumes the newest items are sold first, and Weighted Average Cost calculates an average cost for all items available for sale.

2. How do changes in inventory impact financial statements?

Ans. Changes in inventory affect the balance sheet and income statement. On the balance sheet, inventory is an asset, and fluctuations in inventory levels can affect total assets. On the income statement, the cost of goods sold (COGS) is influenced by the valuation method used, which in turn affects net income.

3. What is the importance of inventory management for businesses?

Ans. Inventory management is crucial for businesses as it helps maintain the right balance of stock, minimize holding costs, reduce stockouts or overstock situations, and improve cash flow. Effective inventory management can lead to better customer satisfaction and increased profitability.

4. How do businesses determine the optimal level of inventory?

Ans. Businesses determine the optimal level of inventory by analyzing factors such as demand forecasts, lead times, holding costs, and turnover rates. Techniques like Economic Order Quantity (EOQ) and Just-In-Time (JIT) inventory systems can assist in finding the ideal inventory level.

5. What are the common challenges faced in inventory management?

Ans. Common challenges in inventory management include inaccurate demand forecasting, excess inventory leading to increased holding costs, stockouts resulting in lost sales, and managing inventory across multiple locations. Implementing technology and inventory management systems can help address these issues.

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Sep 09, 2025 Last updated

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