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Accounting Services

INVENTORY
Effective: June 1, 2000
Related Policy

Procedures:

Inventories should be recorded as an asset on the University's financial records. The department head is responsible for the proper valuation of inventory and for ensuring that detailed documentation is retained of the inventory valuation. Inventories include items owned by the department whether stored on site or off site. Departments that do not maintain a perpetual inventory system must take a mandatory inventory as close to the last day of the fiscal year (June 30) as possible. Inventories taken at other times would need to be adjusted for purchases and sales from the date of the inventory to June 30 in order to calculate the actual inventory balance at the end of business on June 30.

Departments that maintain a perpetual inventory system and cycle count their inventory, may not be required to perform a year-end physical inventory. All inventory items must be counted at least once a year through the cycle count process. Approval to allow the perpetual system and its related cycle counts to be substituted for the fiscal year-end physical inventory count, must be requested and obtained from the Controller or Associate Controller.

Inventories should be valued at cost using a generally accepted method of inventory valuation with consideration given for identifying obsolete or damaged goods. Obsolete or damaged goods should be valued at market value (lower of cost or market method) instead of at cost. No items should be valued at retail.

Contact Accounting Services if assistance is needed in determining if items should be recorded on the University financial system.

Guidelines:

Either a perpetual or periodic inventory system can be used.

  1. Perpetual Systems - Purchases at cost are recorded directly to an inventory asset account. Items expended are deducted from the inventory account and charged to a cost of goods sold account. The value of the inventory asset account should be the same as the value of the cost of the inventory on hand. As a control feature, spot counts should be made throughout the year and reconciled with the perpetual inventory records to help ensure the accuracy of the records. Cycle counts of all items should be made during the year to verify the validity of the perpetual records and to adjust for breakage, theft, obsolete items, etc.
  2. Periodic Systems - Purchases at cost are recorded directly to the cost of goods sold account. The beginning of the year inventory balance remains in the asset account until a physical inventory count is taken. The asset account is adjusted to the physical inventory count balance at the end of the year.
    Prior to the year-end physical inventory, Internal Audit Department and Accounting Services should be notified of the scheduled physical inventory date. Internal Audit and the University's external auditors may observe the actual physical inventory count.

All items included in inventory should have verification of beginning balances for the current accounting period. Individuals who are independent from the day-to-day receiving or issuing of the inventory items should perform the counts. If it is not practical for all individuals to be independent, the individuals should work in small teams where at least one individual is independent.

All inventory items should be counted with any damaged or obsolete items noted. Detailed inventory sheets should include the number of units, the unit costs and their extended value (quantity times unit costs). Upon completion of the physical count, management should:

  • Review the inventory sheets for damaged or obsolete items. Costs for these items should be recorded at the lower of cost or market.
  • Ensure that all items have been counted.
  • Verify accuracy of the quantity by recounting a sample of the items.
  • Verify mathematical accuracy of the extended values and the total inventory value.

The inventory value should be provided to Accounting Services within one week after the fiscal year end