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					   Inventory

    What is it?
Why is it important?
                 A Little Quiz
   You are a banker.
   A student comes to you who has been in
    agriculture for two years and asks for a loan of
    $1,000 to expand his potpourri business. It is
    early October.
   This person has been in this business for over a
    year now and has earned only $250.
   Do you make the loan, deny the loan, or ask for
    additional information?
           What is Potpourri?
   a jar, bowl or container of mixed flower
    petals, dried plant materials, fragrances
    and spices used as perfume
   People like to have containers of potpourri
    sitting around during holidays.
     What was your decision on the
                loan?
   It would be wise to ask a simple question…
   The questions is, “Do you have a large supply of
    potpourri to sell during the upcoming holiday
    season?”
       It is possible the student has several hundred bags of
        Pumpkin Spice, Holiday Harvest, Winterberry and
        other holiday fragrances to sell.
   It would be extremely helpful to know what type
    of inventory the student has on hand to sell.
              The Inventory

   In financial record keeping, the inventory
    is a very important part of record
    keeping.
         What is an Inventory?

   In financial record keeping, an inventory is
    the company's merchandise, raw materials
    and finished and unfinished products
    which have not yet been sold.
    When is an Inventory Taken?

   Typically, an inventory is taken when a
    student enters the agriculture program or
    starts an SAE program.
   This inventory serves as a starting point
    so that a student can determine how
    much financial progress has been made.
    When is an Inventory Taken?

   An inventory is normally conducted once a
    year in December.
   The IRS recommends that an inventory be
    taken at the end of the year.
    When is an Inventory Taken?

   For agricultural students, this inventory is
    often taken in December of the year after
    the student starts agriculture classes.
       Student enrolls in agriculture class in August
        of 2004 and takes a beginning inventory.
       The next inventory is taken in December of
        2005 and each December thereafter.
              Important Points
   The ending inventory for one year serves as the
    starting inventory for the next year.
   The value of the inventory at the start of the
    year is subtracted from the inventory at the end
    of the year to help determine if a profit has been
    made.
   The fair market value of the product on hand is
    used to determine the value of the product on
    hand.
     What Items are Included in an
              Inventory?
   Growing crops               Livestock
   Harvested crops in          Land owned by the
    storage that are not         student
    yet sold                    Scientific equipment
   Equipment                   Greenhouse supplies
   Feed not yet used           Floral Supplies
   Seed not planted            Aquaculture tanks
   Fertilizer not used         100s of other items
   Agricultural chemicals
        What Items are Typically NOT
         Included in an Inventory?
   For agricultural SAE record keeping, we typically
    don’t include personal property such as:
       CD players
       Jewelry
       Clothing
       Personal vehicles
       Hunting and Fishing Equipment
       Compact Discs
       Cell phones
Of What Value is an Inventory?

   Helps to determine whether or not the
    business is making a profit
       It is possible that you may not have sold
        anything yet, but the fact that you have
        products on hand that could be sold indicates
        the business may be profitable.
Of What Value is an Inventory?

   Helps in making management decisions
       Perhaps there is a surplus of some items that
        need to be sold. Or you may not need to buy
        any more feed or fertilizer for a while.
Of What Value is an Inventory?

   May be needed to get credit
       The inventory presents a truer picture of the
        financial condition of an enterprise. A person
        may not have much money on hand but may
        have a large inventory of products to be sold.
Of What Value is an Inventory?

   Used to determine net worth
       In the next lesson, we will look at financial
        statements that are used to determine your
        net worth. The inventory enters into that
        calculation.
Of What Value is an Inventory?

   Can be used to determine fraud
       Inventories are used to determine if
        employees are dishonest. If you buy 100
        products to sell, have records that only 50
        items have been sold, but can only count 20
        items in the inventory, you know that 30
        items are missing.
How Does One Take an Inventory?

   An inventory is very simple.
   You make a list of items on hand (count or
    weigh the items) that have not yet been
    used up or sold and then determine their
    value.
   Then add up that list.
                   However…
   There are times when calculating the inventory
    can become more complicated than what has
    been mentioned so far.
   But, in some states, there is no concern about
    the more complicated situations regarding the
    inventory in SAE recordkeeping.
   So, if this is the case in your state, you can stop
    here.
               Or Continue on…

   If you need to learn more about the
    complexities of taking the inventory such
    as:
       Depreciation
       Current and Non-Current Assets
   Continue on
               Depreciation

   In determining the value of an item for an
    inventory, you may need to account for
    depreciation.
   Depreciation is a decline in the value of
    property. Equipment and other pieces of
    property just wear out and decline in
    value.
               Depreciation

   Instead of guessing how much a piece of
    equipment had declined in value, the
    federal government had established
    standard guidelines for figuring
    depreciation.
                  Depreciation

   To be depreciable, the property must
    meet all the following requirements:
       It must be property you own.
       It must be used in your business or income-
        producing activity.
       It must have a determinable useful life.
       It must be expected to last more than one
        year.
    Methods for Figuring Deprecation

   There are a number of different methods
    for figuring deprecation.
   One of the simplest is “Straight Line.”
       Straight Line Depreciation
   This method lets you deduct the same amount
    of depreciation each year over the useful life of
    the property.
   To figure your deduction, first determine the
    cost, salvage value and estimated useful life of
    your property. Subtract the salvage value, if
    any, from the cost.
   Divide the balance by the number of years in the
    useful life. This will give you your yearly
    depreciation deduction.
                Straight Line

   This amount will stay the same
    throughout the time you own the
    property.
   If in the first year you use the property for
    less than a full year, you must pro-rate
    your depreciation deduction for the
    number of months in use.
          Depreciation Example
   Cost of Lawn Mower - $275
   Useful Life - 3 years
   Salvage value - $35
   Depreciable value ($275-$35=$240)
   $240 divided by 3 years of life - $80 annual
    depreciation
   Inventory Value after one year = $275-80=$195
   Inventory Value after two years - $195-80=$115
   Inventory Value after three years - $115-80=$35
                 Inventory

   Each year when you take the inventory,
    you use the depreciated value of the item.
   Note: The IRS has guides to help you
    determine the years of useful life of a
    property.
       Why figure depreciation?

   For tax purposes (You can write off
    depreciation in a business.)
   To get a more accurate picture of your
    inventory
    One other depreciation note…

   Items you raise (lambs, pigs, flowers,
    trees, cows, etc.) are not depreciable
   Items you build (gates, corrals, carts) are
    not depreciable
   Items you buy (cows, gates, trees) are
    depreciable.
               Terminology

   Items in an inventory are called assets.
   An asset is any item of economic value
    owned by an individual or corporation,
    especially that which could be converted
    to cash. Examples are cash, securities,
    accounts receivable, inventory, office
    equipment, a house, a car and other
    property.
                Terminology

   If the asset will be used or sold within 12
    months of the inventory, it is called a
    “current” asset.
   If the asset will not be sold (or used)
    within 12 months of the inventory, it is
    called a “non-current” asset.
                          The Inventory
   Normally, in calculating the inventory, there are different
    sections:
       Items that are non-depreciable
            Items that will be used or sold within one year (current assets)
                  Lambs to be sold in the spring
                  Seeds that will be planted in the spring
                  Fertilizer that will be used
                  Fuel and oil
            Items that will be used or sold after more than a year (non-current
             assets)
                  Trees that you grew
                  Breeding livestock that you raised
       Items that are depreciable
            Livestock you bought
            Equipment you bought

				
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