11_Inventory.ppt
- 1. 02/12/04 1 Inventory Chapter 11 of The Guide Accounting & Budget Services Jud Hurd, Controller
- 2. 02/12/04 2 I. Purpose Review the concept of Inventory Provide the policies, guidelines and procedures associated with managing inventories Answer all your questions Support provided by Area Accountant
- 3. 02/12/04 3 II. Overview & Objectives Overview Purchase of goods for consumption or sale may represent inventory If you have an inventory Have to maintain records Perform annual count and reporting
- 4. 02/12/04 4 Overview & Objectives Objectives Allow for proper assignment of costs to an accounting period Show expense in period consumed or when sold and generated revenue Present accurate value on our balance sheet Comply with State Controller requirements
- 5. 02/12/04 5 III. Definition Per State Controller Fiscal Procedures Manual 3.14 All agencies should record on their balance sheet at June 30 significant supplies or other consumable inventories. Significant for this purpose is defined as inventories totaling $100,000 or more per location
- 6. 02/12/04 6 Definition CU policy uses a threshold of $35,000 The State Controller threshold prior to his change to $100,000 CU applies the same threshold to inventories for sale – Bookstore Inventories less than $35,000 should be expensed when bought Cost-of-goods sold if sold internally or externally Other category if consumed
- 7. 02/12/04 7 Definition Location is defined as physical location for type of inventory by department Have to use judgment Housing food supplies at warehouse and in cafeterias Facilities management different inventory by shop Paint, Carpentry, Roofing, Stores, Sheet metal
- 8. 02/12/04 8 Definition Examples UMC Food Service Games Area Wardenburg Bookstore Facilities Management Chemistry Store Imaging Services Mailing Services Postage Housing Cogeneration
- 9. 02/12/04 9 IV. Internal Controls Goal is to safeguard the inventory It doesn’t walk away or is destroyed Design your departmental inventory procedures Document them in writing Identify procedures, controls and who has what responsibility Keep current Train everybody involved
- 10. 02/12/04 10 Internal Controls Separation of duties between People who have physical access to inventory Receiving, distributing, selling People who do the accounting Ordering, booking and adjusting PS for sales or usage
- 11. 02/12/04 11 Internal Controls Provides checks and balances for each other PS value should always reflect actual value of inventory on hand Not able to walk away with inventory and cover up by adjusting the PS book value
- 12. 02/12/04 12 Internal Controls Establish a system to record in PS all Acquisitions, sales, returns and adjustments Physical security – record all movements Ensure the inventory is physically controlled and secure Warehouse and sales floor Limit access to the inventory Not able to remove inventory without it being recorded
- 13. 02/12/04 13 Internal Controls Conduct a periodic count and costing of the inventory Required at year-end More often as needed is recommended Compare value of inventory on hand with PS value Major differences must be investigated and resolved Could indicate lack of control and theft is occurring
- 14. 02/12/04 14 V. Establishing & Maintaining Inventory Record all purchases in PS Balance sheet accounts 030000 – 049999 03xxxx – Inventories – Sales External to University 04xxxx – Inventories – Internal Sales/Consumed User option of each range has to be consistent with lead account
- 15. 02/12/04 15 Establishing & Maintaining Inventory Inventory value changes daily with purchases, sales, returns and adjustments Increased by purchases and returns from customers Decreased by sales, return to vendor, loss, theft, disposal due to obsolescence Increased or decreased by adjustment of physical count to book value
- 16. 02/12/04 16 Establishing & Maintaining Inventory Balance sheet transaction report shows the inventory value and all transactions adjusting it Summary of Budget, Revenue, Expenses and Transfers shows the inventory as an expense upon sale (cost-of-goods sold) or consumption (some kind of supplies category)
- 17. 02/12/04 17 Establishing & Maintaining Inventory System must keep track of Each category of items Count that should be on hand Value of count that should be on hand Use sophisticated inventory software packages, or card file, or excel spreadsheets Depends on size and complexity of inventory
- 18. 02/12/04 18 Simple Example Custodian shop purchases 40 cans of floor wax at $6.00/can and pays $4.00 in freight ($.10 per can). Total cost is $244. Per can value is $6.10. Dr Inventory 040000 $244.00 Cr cash via AP system ($244.00)
- 19. 02/12/04 19 Simple Example Department uses 4 cans of wax. Prepare JE to move inventory to expense Dr 515109 Bldg maint & repair $24.40 Cr inventory 040000 ($24.40) PS inventory will now show a value of $219.60, 36 cans @ $6.10
- 20. 02/12/04 20 Simple Example Custodian shop sells 10 cans of wax to ABS at $7.00 per can. Use an IN transaction to record the sale Dr ABS ID expense account $70.00 Cr Custodian shop ID revenue ($70.00) Dr Custodian shop CGS 450200 $61.00 Cr inventory 040000 ($61.00) PS inventory will now show a value of $158.60, 26 cans @ $6.10
- 21. 02/12/04 21 Simple Example Physical inventory shows only 24 cans on hand. Prepare JE to record loss of 2 cans Dr Physical inventory adjustment 450300 $12.20 Cr inventory 040000 ($12.20) PS inventory will now show a value of $146.40, 24 cans @ $6.10 Figure out what happened to the two cans
- 22. 02/12/04 22 VI. Valuing the Inventory Valuing the inventory is choosing a method by which you represent the value of the inventory on hand on the balance sheet And subsequently charged to expense Three methods used by CU First in, first out – FIFO Average cost Retail
- 23. 02/12/04 23 Valuing the Inventory Under each method, department must maintain records supporting: Purchases and their cost Items sold Items returned Items adjusted Allows auditors to verify the accuracy of your valuation
- 24. 02/12/04 24 FIFO Assumes inventory is sold or used in same order purchased – the first inventory purchased is the first inventory sold Items in inventory then are the most recently purchased Keeps track of each item of inventory by its actual cost
- 25. 02/12/04 25 FIFO Custodian shop purchases 40 cans of floor wax at $6.00/can and pays $4.00 in freight ($.10 per can). Total cost is $244. Per can value is $6.10. Floor wax inventory record 1/15/04 purchase 40 @ 6.10 = $244.00
- 26. 02/12/04 26 FIFO A few days later, 100 cans bought at $5.50/can plus $10.00 freight ($.10/can) Floor wax inventory record 1/15/04 purchase 40 @ $6.10 = $244.00 1/20/04 purchase 100 @ $5.60 = $560.00 Total 140 = $804.00
- 27. 02/12/04 27 FIFO A few days later sell 120 cans @ $7.00/can Record the revenue and CGS as shown earlier CGS is: 40 @ $6.10 = $244.00 80 @ $5.60 = $448.00 Total = $692.00
- 28. 02/12/04 28 FIFO Floor wax inventory record 1/15/04 purchase 40 @ $6.10 = $244.00 1/23/04 sell 120 (40) @ $6.10 = ($244.00) 1/20/04 purchase 100 @ $5.60 = $560.00 1/23/04 sell 120 (80) @ $5.60 = ($448.00) Total 20 @ $5.60 = $112.00
- 29. 02/12/04 29 FIFO If the physical inventory counts 20 items, valued at $5.60 then actual value on hand equals book value No adjustment to book needed If count is different than 20, adjust at $5.60/can
- 30. 02/12/04 30 Average Cost For each purchase of inventory, you calculate a new average cost for all items in inventory The formula is: Dollars on hand + purchases ----------------------------------- = New cost per unit Count on hand + purchases
- 31. 02/12/04 31 Average Cost Custodian shop purchases 40 cans of floor wax @ $6.00/can and pays $4.00 in freight ($.10 per can). Total cost is $244. Per can value is $6.10. Floor wax inventory record 1/15/04 purchase 40 @ 6.10 = $244.00
- 32. 02/12/04 32 Average Cost A few days later, 100 cans bought at $5.50/can plus $10.00 freight ($.10/can), total cost $560.00 Floor wax inventory record $244 + $560 $804 --------------- = ------- = 140 cans @ $5.7429 40 + 100 140
- 33. 02/12/04 33 Average Cost A few days later sell 120 cans @ $7.00/can Record the revenue and CGS as shown earlier CGS is: 120 @ $5.7429 = $689.15 Compared to $692.00 under FIFO Inventory on hand is 20 @ $5.7429 = $114.86 Compared to $112.00 under FIFO
- 34. 02/12/04 34 Average Cost If the physical inventory counts 20 items, valued at $5.74.29 then actual value on hand equals book value No adjustment to book needed If count is different than 20, then adjust at $5.7429/can
- 35. 02/12/04 35 Retail This method calculates CGS based upon a percentage of sales which is based upon a consistent percentage markup over cost Operating policy is to markup floor wax by 20% over cost
- 36. 02/12/04 36 Retail Custodian shop purchases 40 cans of floor wax at $6.00/can and pays $4.00 in freight ($.10 per can). Total cost is $244. Per can value is $6.10. Floor wax inventory record 1/15/04 purchase 40 @ 6.10 = $244.00
- 37. 02/12/04 37 Retail A few days later, 100 cans bought at $5.50/can plus $10.00 freight ($.10/can) Floor wax inventory record 1/15/04 purchase 40 @ $6.10 = $244.00 1/20/04 purchase 100 @ $5.60 = $560.00 Total 140 = $804.00
- 38. 02/12/04 38 Retail A few days later sell 120 cans @ $7.00/can Record the revenue and CGS as shown earlier CGS is: Sales of $840 divided by markup 120% (1.2) = $700.00 Compared to $692.00 under FIFO Compared to $689.15 under Average
- 39. 02/12/04 39 Retail Inventory on hand per records is $804 less CGS $700 = $104 Compared to $112.00 under FIFO Compared to $114.86 under Average If the physical inventory counts 20 items, The retail price is 20 x $7.00 = $140.00 Inventory on hand value is $140 divided by 1.2 = $116.67 Compared to $112.00 under FIFO Compared to $114.86 under Average
- 40. 02/12/04 40 Retail A $12.67 write-up adjustment to books needed Debit inventory 040000 $12.67 Credit inventory adjustment 450300 ($12.67) Doesn’t work well when you have fluctuating costs Control solely based on item count Can’t rely much on the dollars
- 41. 02/12/04 41 VII. Year-End Physical Inventory Good internal controls and State Fiscal Procedures require that a physical inventory count and valuation be completed at least at year-end Good to do more often if possible Supports the balance sheet value Should be completed between April 1 and June 30
- 42. 02/12/04 42 Year-End Physical Inventory ABS distributes information in early May Announcing time to do annual inventory Provide instructions and worksheets Available to answer questions