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Chapter 11 Inventory

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Chapter 11 Inventory

    UNIVERSITY OF COLORADO AT BOULDER

    DEPARTMENTAL FINANCIAL MANAGEMENT GUIDE

     INVENTORY

    TABLE OF CONTENTS - CHAPTER 11

    I. CHAPTER 11 INVENTORY ................................................................. 1 II. OVERVIEW AND OBJECTIVES ............................................................. 1 A. Overview ............................................................................................... 1 B. Objectives ............................................................................................. 1 III. DEFINITION OF INVENTORY .............................................................. 1 IV. INTERNAL CONTROLS ......................................................................... 2 V. ESTABLISHING AND MAINTAINING AN INVENTORY ........................... 2 VI. VALUING THE INVENTORY .................................................................. 4 A. FIFO ..................................................................................................... 5 B. Weighted Average .................................................................................. 6 VII. YEAR-END PHYSICAL INVENTORY ...................................................... 7 VIII. EXHIBITS ........................................................................................... 8

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    CHAPTER 11: INVENTORY 11/09

    UNIVERSITY OF COLORADO AT BOULDER

    DEPARTMENTAL FINANCIAL MANAGEMENT GUIDE

     INVENTORY

    I. CHAPTER 11 INVENTORY The purpose of this chapter of The Guide is to explain the concept of inventory

    and to discuss the policies, guidelines, and procedures associated with inventory

    on the Boulder campus.

    II. OVERVIEW AND OBJECTIVES

A. Overview

    Each department’s purchases of goods for consumption or resale may

    represent inventory. Departments that hold inventory must maintain inventory

    records which accurately reflect the valuation of the inventory at the end of

    each month. Additionally, such departments must conduct an annual inventory.

B. Objectives

    The principal accounting objectives of maintaining inventories are:

    1. To allow for the proper assignment of costs to an accounting period.

    2. To present an accurate portrayal of the department’s assets on the

    university’s financial statements.

    III. DEFINITION OF INVENTORY

    The State of Colorado year-end closing instructions define inventories as those

    that total $35,000 or more per location. If inventories of lesser amounts are

    recorded on the Balance Sheet Statement, they must be verified by physical count.

In order to minimize year-end workload, inventories of less than $35,000 will not

    be booked in the general ledger inventory codes. These smaller inventories should

    be expensed to cost of goods sold as they are purchased. As a valid internal

    control function, departments may choose to continue their inventory records to

    verify and control quantities on hand. However, these smaller inventory amounts

    should not be booked by the department.

Some examples of inventory are:

    ? Merchandise or publications offered for sale

    ? Maintenance supplies

    ? Office supplies

    ? Postage

    ? Laboratory supplies

    ? Medical supplies

    ? Raw materials used in production.

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    11/09 INVENTORY: CHAPTER 11

    UNIVERSITY OF COLORADO AT BOULDER

    DEPARTMENTAL FINANCIAL MANAGEMENT GUIDE

     INVENTORY

    IV. INTERNAL CONTROLS

    Each department is responsible for safeguarding the university’s assets, whether

    those assets are in the form of cash, merchandise, or supplies. A system of internal

    control is needed to ensure that appropriate management of these assets occurs.

    Good inventory internal controls incorporate the following.

    1. Written departmental inventory management policy and procedures. Staff

    must be trained on departmental policy and procedures.

    2. Adequate separation of duties between those responsible for the physical

    inventory (ordering, receiving, distributing/selling) and those responsible

    for the inventory accounting records (approving payments, charging

    departments/customers, maintaining the perpetual inventory balance in the

    Finance System and reconciling the Finance System).

    3. An internal inventory system that records all inventory activity, including

    acquisitions, sales, returns and adjustments.

    4. Adjusting the Finance System inventory value for all inventory activity,

    including acquisitions, sales, returns, and adjustments.

    5. Securing the inventory in such a manner so that inventory may not be

    removed or otherwise affected without a record being made of the event.

    6. Conducting a periodic count and costing of the inventory. This must be

    done at least annually for the university’s June 30 fiscal year-end. More

    frequent counts should be made depending upon the size and vulnerability

    to misappropriation of the inventory. Compare the count and costing to the

    inventory record system and to the Finance System. All differences should

    be investigated and explained.

    V. ESTABLISHING AND MAINTAINING AN INVENTORY

    All purchases of inventoriable goods are to be recorded by using The Finance

    System account range 030000-049999. Selection of the specific account is

    determined by the type of inventory. The selection of control codes is determined

    by type of inventory.

030000039999: Inventories Sales External to University

    This account presents the value of inventories on hand that are expected to be sold

    to customers outside of the university.

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    CHAPTER 11: INVENTORY 11/09

    UNIVERSITY OF COLORADO AT BOULDER

    DEPARTMENTAL FINANCIAL MANAGEMENT GUIDE

     INVENTORY

    040000049999: Inventories Internal Sales/Consumed

    This account is similar to account 030000, above, but consumption takes place

    inside of the university, and is charged as an expenditure.

04000104xxxx: User Defined Inventory Accounts

    Accounts within this range are similar to account 040000. Consumption of the

    goods takes place within the university and is charged to supplies or other

    appropriate expense accounts. For a complete list of user defined inventory

    accounts, go to the Chart of Accounts, accessible from the System Controller’s

    website: http://www.cu.edu/System_Controller/fin-system-info.html

    The value of a department’s inventory normally fluctuates due to purchases and sales that occur during each accounting period. The Balance Sheet Statement

    Detail reports the inventory value. The Revenue and Expense Statement Summary

    presents the amount of sales and provides the amount for cost of goods sold.

Inventories increase when purchases are made, or when goods are returned by

    customers. Inventories decrease as a result of sales, consumption of goods, or

    when goods are returned to vendors.

Each department having an inventory is required to keep inventory records. These

    records must clearly and accurately show the actual inventory count and inventory

    valuation at any given date. Such records can be as sophisticated as an inventory

    software package, or as simple as a card file system.

Example

    Department X has an inventory of maintenance supplies. The department

    purchases forty cans of floor wax at $6.00 per can, and pays $4.00 in freight ($.10

    per can) on the purchase. Total cost of the purchase is $244.00.

     Debit Inventory, Program FOPPS - account 0400xx $244.00

     Credit Cash (affected via PO/SPO voucher) $244.00

Department X used four cans of wax. A journal entry is prepared to remove the

    four cans that were used from the inventory in a departmental FOPPS. The cost of

    each can includes the added burden for freight: $244.00/40 cans = $6.10 per can.

    Thus, the total cost for the four cans is $24.40.

     Debit Expense, Program FOPPS - account 515109 $ 24.40

     Credit Inventory, Program FOPPS - account 0400xx $ 24.40

The new inventory balance is $219.60. This is comprised of 36 cans at $6.10 each.

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    11/09 INVENTORY: CHAPTER 11

    UNIVERSITY OF COLORADO AT BOULDER

    DEPARTMENTAL FINANCIAL MANAGEMENT GUIDE

     INVENTORY

    Department X now sells ten cans of floor wax to Department Y at $7.00 per can.

    An IN is used to record the sale; and a journal entry is used to remove the cans

    sold from inventory.

    The IN to record the sale (Ten cans at $7.00 = $70.00):

     Debit Dept Y Exp, Program FOPPS - account 515109 $ 70.00

     Credit Dept X Rev, Program FOPPS - account 380100 $ 70.00

    The journal entry to record the cost of goods sold and to remove the cans sold

    from inventory (Ten cans at $6.10 = $61.00):

     Debit Cost of Goods, Program FOPPS - account 450200 $ 61.00

     Credit Inventory, Program FOPPS - account 0400xx $ 61.00

    Thus, Department X has $9.00 in net revenue ($70.00 Revenue minus $61.00

    Cost of Goods) and has an inventory balance of $158.60, 26 cans of floor wax.

    Prior to the fiscal year end closing on June 30, Department X completed its annual

    physical inventory count and discovered that two cans of the floor wax were

    defective. A journal entry is used to adjust the physical inventory for the defective

    cans.

    The journal entry to adjust the inventory (two cans at $6.10 = $12.20) is:

     Debit Physical Inventory Adjustment,

     Program FOPPS - account 450300 $ 12.20

     Credit Inventory, Program FOPPS - account 0400xx $ 12.20

    Thus, the adjusted inventory balance for Department X is $146.40. Twenty-four

    cans of floor are reported on the department’s Reporting System Balance Sheet

    Statement Detail Report.

VI. VALUING THE INVENTORY

    Several methods exist for valuing the inventory on hand. The university uses

    First-In, First-Out (FIFO) and Weighted Average. There are advantages and

    disadvantages to both methods, but each assigns a value to the goods remaining in

    inventory. The method chosen must be applied consistently from year to year. A

    change of method must be approved in writing by the ABS General Accounting

    Manager. A brief description of each method follows.

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    CHAPTER 11: INVENTORY 11/09

    UNIVERSITY OF COLORADO AT BOULDER

    DEPARTMENTAL FINANCIAL MANAGEMENT GUIDE

     INVENTORY

    A. FIFO

    The assumption under FIFO is that the items in inventory are sold or used in

    the order in which they are purchased. Thus, the first items acquired are

    assumed to be the first ones sold or used. Therefore, the items in the inventory

    are assumed to be those from the most recent purchases, and would be priced

    at the cost of those recent purchases. Documentation showing the cost of those

    purchases should be maintained and easily accessible.

    Example

    Department X purchases 40 cans of floor wax at $6.00 per can, and pays $4.00

    in freight ($.10 per can) on the purchase. Total cost of this purchase is $244.00.

     Debit Inventory, Program FOPPS - account 0400xx $244.00

     Credit Cash (via PO/SPO voucher) $244.00

    A few days later, Department X makes another purchase of the same floor wax,

    after being notified by Department Y that a large quantity of floor wax will be

    needed within a few days. This time, Department X purchases 100 cans of

    floor wax at $5.50 per can, and pays $10.00 ($.10 per can) in freight. Total

    cost of this purchase is $560.00.

     Debit Inventory, Program FOPPS- acct 0400xx $560.00

     Credit Cash (via PO/SPO voucher) $560.00

    Total inventory now on hand is 140 cans of floor wax, for a total of $804.00.

    ? The first 40 cans have a unit cost of $6.10/can.

    ? The next 100 cans have a unit cost of $5.60/can

    Department X fills Department Y’s order of 120 cans of floor wax, at $7.00

    per can. An IN is used to record the sale, and a journal entry is used to remove

    the cans sold from inventory.

    The IN to record the sale (120 cans at $7.00 = $840.00) is:

     Debit Dept Y Expense,

     Program FOPPS - account 515109 $840.00

     Credit Dept X Revenue,

     Program FOPPS - account 380100 $840.00

    Use a journal entry to deduct the value from the inventory account (the initial

    40 cans purchased at $6.10 per can for a total of $244.00 and the 80 cans from

    the second purchase at $5.60 per can for a total of $448.00):

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    11/09 INVENTORY: CHAPTER 11

    UNIVERSITY OF COLORADO AT BOULDER

    DEPARTMENTAL FINANCIAL MANAGEMENT GUIDE

     INVENTORY

     Debit Cost of Goods, Pgm FOPPS - acct 450200 $692.00

     Credit Inventory, Program FOPPS - acct 0400xx $692.00

    Thus, Department X has $148.00 in net revenue ($840.00 - $692.00), and has

    an inventory balance of $112.00 (20 cans of floor wax at $5.60 a can).

B. Weighted Average

    The assumption under the weighted average method is that the average cost of

    the inventory is influenced or “weighted” by the number of units acquired at

    each price. It is computed by dividing the total cost of beginning inventory

    plus purchases, by the total number of units in these two categories, and then

    multiplying the result by the number of units in ending inventory. This method

    is generally associated with periodic inventories. Documentation supporting

    the average cost calculation of each inventory item should be maintained and

    easily accessible.

    Total Cost of Beginning Inventory + Purchases x # of units

    Total # of units in Beginning Inventory + Purchases in ending Inventory

    Example:

    Department X purchases 40 cans of floor wax at $6.00 per can, paying $4.00

    in freight ($.10 per can) on the purchase. The total cost of this purchase is

    $244.00

     Debit Inventory, Program FOPPS - account 0400xx $244.00

     Credit Cash (affected via PO/SPO voucher) $244.00

    A few days later, Department X makes another purchase of the same floor wax,

    after being notified by Department Y that a large quantity of floor wax will be

    needed within a few days. This time, Department X purchases 100 cans of

    floor wax at $5.50 per can, and pays $10.00 ($.10 per can) in freight. Total

    cost of this purchase is $560.00.

     Debit Inventory, Program FOPPS- acct 0400xx $560.00

     Credit Cash (via PO/SPO voucher) $560.00

    Total inventory on hand is 140 cans of floor wax for a total of $804.00. Each

    can has a weighted average cost of $5.7429. This is calculated by taking the

    initial 40 can purchase cost of $244.00 plus the additional 100 can purchase

    cost of $560.00, and dividing this combined cost by the 140 total cans

    purchased: ($244.00 + $560.00)/140 = $5.7429 per can.

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    CHAPTER 11: INVENTORY 11/09

    UNIVERSITY OF COLORADO AT BOULDER

    DEPARTMENTAL FINANCIAL MANAGEMENT GUIDE

     INVENTORY

    Department X fills Department Y’s order of 120 cans of floor wax, at $7.00

    per can. An IN is used to record the sale, and a journal entry is prepared to

    remove the cans sold from inventory.

    The IN to record the sale (120 cans at $7.00 = $840.00) is:

     Debit Dept Y Expense,

     Program FOPPS - account 515109 $840.00

     Credit Dept X Revenue,

     Program FOPPS - account 380100 $840.00

    Use a journal entry to deduct the value from the inventory account (120 cans

    at $5.7429 = $689.15). The journal entry is:

     Debit Cost of Goods, Pgm FOPPS - acct 450200 $689.15

     Credit Inventory, Program FOPPS - acct 0400xx $689.15

    Thus, Department X has $150.85 in net revenue, and has an inventory balance

    of $114.86 (20 cans of floor wax at $5.7729 per can).

    VII. YEAR-END PHYSICAL INVENTORY

    Each department with an inventory is required to take a physical count at least

    once a year to ensure that an accurate asset value is reported on the Balance Sheet

    Statement Summary Report and that the cost of goods sold is recorded correctly

    on the Revenue and Expense Statement Summary. This annual count should be

    completed within the three months prior to fiscal year-end close (June 30). Each

    department’s responsible person needs to schedule the actual count, establish

    cutoff procedures, and supervise the physical inventory process.

Cutoff procedures are designed to ensure that inventory transactions are properly

    recorded and included in the current year financial statement. Inventory quantities

    include all items on hand or in transit. The inclusive and exclusive inventory

    items in transit are based on passage of title. In general, inventory items received

    but not paid are included in the physical inventory. Inventory items shipped to

    customers are deducted from the physical inventory. The responsible person must

    also review the inventory adjustments and amounts that will appear on the fiscal

    year-end Balance Sheet Statement Detail.

The departmental inventory responsible person must complete the following:

    1. Physical Inventory Summary Report (Exhibit 1 provides an Example, and

    Exhibit 2 is a Master Form.)

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    11/09 INVENTORY: CHAPTER 11

    UNIVERSITY OF COLORADO AT BOULDER

    DEPARTMENTAL FINANCIAL MANAGEMENT GUIDE

     INVENTORY

    2. Physical Inventory Test Count (Exhibit 3. This serves as supporting

    documentation to the Physical Inventory Summary Report.)

    3. One copy of the Prorate Inquiry Record (Finance System Allocation Entry),

    if applicable.

    4. Inventory Reconciliation (Exhibit 4 provides an Example, and Exhibit 5 is

    a Master Form.)

    5. One copy of the controlling Finance System Program Statement

    6. Written departmental physical inventory instructions.

    7. One copy of the final physical inventory listing extended value.

    8. One copy of the adjusting journal entry.

This documentation shall be retained by the department in accordance with the

    Retention of University Records Administrative Policy Statement and accompanying Records Retention Schedule: https://www.cu.edu/policies/policies/G_Retention-UnivRecords.html

    https://www.cu.edu/policies/policies/G_Retention-UnivRecords-Sch.pdf. ABS

    may contact the department and conduct a review of the above-listed

    documentation. In addition, the above documentation must be made available to

    the auditors upon request.

    VIII. EXHIBITS

    Examples and Master Forms for the inventory reports listed below are found on

    the pages that follow. These forms can either be used as is or departments may

    develop their own forms as long as substantially the same information is recorded.

    Exhibit 1 Example Physical Inventory Summary Report

    Exhibit 2 Master Form Physical Inventory Summary Report

    Exhibit 3 Master Form Physical Inventory Test Count

    Exhibit 4 Example Inventory Reconciliation

    Exhibit 5 Master Form Inventory Reconciliation

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    CHAPTER 11: INVENTORY 11/09

    UNIVERSITY OF COLORADO AT BOULDER

    DEPARTMENTAL FINANCIAL MANAGEMENT GUIDE

     INVENTORY

    Exhibit 1

    Physical Inventory Summary Report EXAMPLE

    University of Colorado at Boulder

    Department Forms Center Location Regent 188 Responsible Person Susan Storekeeper Extension 2-5555 Date June 30, 2009 Observer Ollie Observer

Business Overview

    ? Operation Distribution of forms to departments ? Document Flow:

    Purchases SPO/PO; Last purchase was 6/18/09

    Sales IN’s only

    Other n/a

Accounting Review

    ? Program’s Balance Sheet FOPPS & Account 2x - 1xxxx - xxxxx 040002 ? Program’s Summary FOPPS & Account 2x - 1xxxx - xxxxx 460200 ? Operation Allocation JEs none ? Costing Method weighted average ? Mark-Up % 10%

Physical Count

    ? General Instructions Items counted by shelf or cabinet

    ? Environment Storeroom is neat and orderly. Stock numbers were clearly marked

Cut-Off Controls

    ? Purchases 6/28/2009 ? Sales Emergency only during closure. None between 6/28 and 7/2.

? INs Same as above

    Count Crew Susan Storekeeper, Andy Assistant, Alice Accountant, Hanna Hourly, William Workstudy

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    11/09 INVENTORY: CHAPTER 11

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