Variation of existences

The change in inventories refers to the evolution of a company’s stored inventories during the year. That is, it analyzes how the stocks that the company has registered in the warehouse vary.

To calculate the variation in inventories, the inventories stored on the first day of the fiscal year are compared with the last day of the fiscal year: this is how we obtain the annual variation in inventories.

Change in inventories = Final inventories – Initial inventories

Although before calculating the change in stocks, we have to calculate the number of stocks at the end of the year. We calculate it with the following formula:

Final stock = Initial stock + Manufactured Stock – Sold Stock

The stocks are goods or products a company produces or purchase order to be resold and the sale is the main activity of the company. When we refer to the concept of “inventories” in the accounting field, we are referring to those goods that have not yet been sold (although the objective is their immediate sale) and, therefore, remain in the company’s warehouse. Since they have not been sold, they have not generated a sales income , although they did generate an expense for their purchase or manufacture.

Therefore, we need to carry out a regularization of inventories to allocate the cost of inventories as they are sold, not as they are bought or manufactured. This regularization is achieved with the change in stocks.

Variation of existences. How does it affect the company’s income statement?

As we have just commented, the change in inventories is intended to make a regularization of inventories to impute the cost of inventories sold. We can find two situations:

  • Increase in stock in warehouse:Occurs when stocks in the warehouse at the end of the fiscal year are greater than at the beginning of the fiscal year. This occurs when the company buys or manufactures more stock than it sells. Accounting reflects an income in counterpart to this increase in inventories.
  • Warehouse stock decrease:Occurs when stocks in the warehouse at the end of the fiscal year are less than at the beginning of the fiscal year. This occurs when the company buys or manufactures fewer stocks than it sells. An expense is reflected in accounting for this decrease in inventories.

With an example of each type it will be better understood:

Stock increase example

Suppose a company that on January 1 (at the beginning of the year) has 100 stocks in the warehouse. During the fiscal year it manufactures 20 stocks while it sells 15. Before calculating the change in inventories, we have to calculate the number of inventories at December 31 (at the end of the fiscal year). We calculate it with the following formula:

Final stock = Initial stock + Manufactured Stock – Sold Stock

In our case, the final stocks are 105 (100 + 20 – 15). Once we obtain the final stocks we can calculate the change in stocks, using the following formula:

Change in inventories = Final inventories – Initial inventories

The change in inventories is +5 = (105 – 100).

This supposes an increase of inventories, since the final inventories in the warehouse are greater than the initial ones. As we have previously commented, an income will be recorded for these 5 stocks in which the warehouse increases, which is reflected in the income statement. The increase in inventories is reflected in the balance sheet.

Stock decrease example

Below we see an example of inventory decrease, to see the difference from the previous case. Suppose a company that on January 1 has 100 stocks in the warehouse. During the year it makes 15 stocks while it sells 20.

Final stocks are 95 (100 + 15 – 20). The change in inventories is – 5 (95 – 100). This supposes a decrease of stocks, since the final stocks in the warehouse are less than the initial ones. An expense will be recorded for these 5 stocks in which the warehouse decreases, which is reflected in the income statement. The decrease in inventories is reflected in the balance sheet.

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