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Section 6: Accounting for Grants and Contracts

Inventory for Resale: Management Guidelines for Service Centers

Effective Date:

02/16/10

Approved By:

Lenora Chapman, Associate Vice President, Financial Affairs

Last Revised On:

10/07/14

For Assistance Contact:

Assistant Vice President, Financial
Affairs and Controller

PURPOSE/SCOPE

To provide guidance on accurately recording the value and minimizing the risk of loss of assets held in inventory by university service centers.

AUTHORITY

Required by:

  • Texas Government Code Ann. Sec. 403.276 (a), (b) (Vernon Supp,1993)

  • UTS118 – Statement of Operating Policy Pertaining to Dishonest or Fraudulent Activities



UNIVERSITY GUIDELINES

Table of Contents

A. Background

The University of Texas at San Antonio (UTSA) service centers purchase and distribute products and supplies that are maintained as inventory until they are sold or used. The following items must be included in inventory:

  • Items purchased explicitly for resale

  • Items purchased in quantity for subsequent use

  • Materials used to produce items for resale

Items outside of these classifications are not considered inventory. Items purchased that are not resold to external parties or other UTSA departments are considered operational expenses for that department.

B. Inventory Accounting Method

In each accounting period, service centers must be able to define or determine the cost of goods sold during that period. To do that, the following must be determined:

  • Beginning inventory

  • Amount of purchases

  • Ending inventory

UTSA utilizes periodic inventory accounting. All service centers perform mandatory inventory counts the last day of the fiscal year (August 31) if possible.

C. Inventory Valuation

Each service center is responsible for the proper valuation of inventory — assigning inventory values by computing the cost of inventory dollar amounts — and for ensuring that detailed documentation supporting the inventory valuation is retained.

The valuation method, such as LIFO, FIFO, weighted average cost or specific identification is used to compute the cost of inventory dollar amounts.

Most service centers at UTSA use the specific identification method, but any valuation method is acceptable as long as the application of the valuation method is used consistently.

D. Controls and Security of Inventory

Carrying large quantities of inventory can in some cases maximize financial benefits; however, large inventory levels can also result in greater risk of theft, damage or obsolescence prior to sale or use.

Each service center is responsible for establishing controls and maintaining security over the entire inventory in all locations. A system for the monitoring of internal controls and procedures for staff and business systems must be implemented by each service center that maintains inventory. Procedures must address the policies and statutes listed in the Authority section of this guideline.
1. Warehouse security

Inventory items should be housed in secure locations that are only accessible to authorized personnel. All warehouse facilities should be equipped with key/key card access systems. Access to inventory warehouses can only be granted by management.

2. Tracking controls

All inventory items must have specific item or part numbers assigned to them so that they can be tracked in the physical warehouse and in the appropriate inventory management system.

E. Ordering Inventory

Inventory must be ordered by approved purchasers following UTSA’s Official Purchasing Policies and Procedures and UTSA Financial Management Operational Guideline (FMOG) - Establishment and Financial Management of service Centers and Specialized Service Facilities.

All purchases must generate an identifier to facilitate order tracking and inventory valuation.

1. Customer returns

If an inventory item is returned, the item must be returned to inventory or to the vendor — for credit or replacement — and the appropriate inventory management system must be updated.

2. Damaged, obsolete and missing inventory

Damaged and obsolete items must be disposed of through the UTSA Surplus Department. All supporting documentation related to damaged, obsolete and missing inventory must be saved and copies attached to the year-end reconciliation to avoid overstatement of the inventory value.

F. Physical Inventory Counts

An inventory count must be conducted annually.  All physical items included in inventory must be verified against the department’s inventory records via a physical inventory count. Damaged or obsolete items must also be noted.

A detailed inventory sheet must include the number of units and the unit cost for all inventory items on hand. Upon completion, management must:

  • Review the inventory sheet(s) for damaged or obsolete items.

  • Ensure that all items have been counted.

  • Verify the accuracy of the quantity by recounting a sample of the items.

  • Verify the mathematical accuracy of the extended values and the total inventory value.

Management must adequately document any adjustments completed to correct any discrepancies that are found.

G. Inventory Reconciliation

Inventory accounts must be reconciled on an annual basis. The reconciliation process verifies that the value of the inventory held in the inventory system is equal to the value in the inventory account in the general ledger.

The Inventory Reconciliation form is used for this purpose.  The form includes information on the physical inventory count process, a section for obsolete inventory adjustments, and a reconciliation section.  The form must be signed by the department head and his/her supervisor, and submitted to the Assistant Vice President, Financial Affairs/Controller by the established due date.

Instructions for completing the form are included in the form.

NOTE: A memorandum is sent in August with instructions for completing the inventory reconciliation process.

H. Year-End Inventory Adjustments

At year-end, the value of inventory on hand is computed and compared to the previous year’s value of inventory on hand.

Adjustments are recorded by the Capital & Special Projects Accountant and are reflected in Account ID 45481 ( “Inventory Adjustments”) .

The adjustment is recorded in the financial accounting system . Inventory sold, obsolete inventory and shrinkage are documented and recorded separately.


DEFINITIONS

Term

Definition

Cost of Goods Sold

The total value (cost) of products sold during a specific time period. Since inventory is an asset, it is not expensed when it is purchased. It goes into an asset account (usually called Inventory). Inventory is credited and the material for resale account is debited when an inventory item is used for services provided.

FIFO Valuation

FIFO is an acronym for "first in, first out.”  In FIFO accounting, the first units purchased are the first units sold.

Inventory

Inventory is a detailed, itemized list, a report of goods and materials on hand, or stock available for use or resale.

LIFO Valuation

LIFO is an acronym for "last in, first out.”  In LIFO accounting, the last units purchased are the first units sold.

Obsolete Inventory

Inventory that has had no sales or usage activity for a specific period of time. The period of time varies by product and may range from weeks to years.

Periodic Inventory Method

A system of inventory control in which no continuous record of changes is kept. At the end of the accounting period, the ending inventory is determined by actual (physical) count of every item and its cost is computed by using a suitable method such as FIFO, LIFO or weighted average.

Specific Identification Method Valuation

An inventory valuation method in which the actual cost of each unit of merchandise is identified and retained until the inventory is issued (used or sold). Each item is identified by purchase date or a serial number.

Weighted Average Cost Valuation

An inventory valuation method that divides  the value of inventory for resale by the value of beginning inventory and purchases. This gives a weighted average cost per unit. A physical count is then performed on the ending inventory to determine the amount of units remaining in inventory. The amount of units is multiplied by the weighted average cost per unit to give an estimate of ending inventory cost.

 

REFERENCES/LINKS

RELATED FORMS/WORKSHEETS

  1. Inventory Reconciliation Form

REVISION HISTORY

Date Description

10/07/14

Replaced all “recharge center” with “service center.”

05/01/14

Updated DEFINE informaiton for transition to PeopleSoft.

02/17/10

Published guideline.

 


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