I.CHAPTER 11 – INVENTORY1
II.OVERVIEW AND OBJECTIVES1
III.DEFINITION OF INVENTORY1
V.ESTABLISHING AND MAINTAINING AN INVENTORY2
VI.VALUING THE INVENTORY4
VII.YEAR-END PHYSICAL INVENTORY7
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.
OVERVIEW AND OBJECTIVES
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, these departments must conduct an annual inventory.
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.
DEFINITION OF INVENTORY
The State of Colorado year-end closing instructions define inventories as those that total $35,000 or more per location. If inventory value drops below $35,000 in the normal course of business (until it is restocked), it continues to be classified as inventory on the books. However, if a decision is made to permanently reduce the inventory below $35,000, it should be reclassified from an asset to an expense.
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
▪ Raw materials used in production(Medical supplies
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...