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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:

N/A

For Assistance Contact:

Assistant Vice President, Financial Affairs and University Controller: (210)458-6914

Capital and Special Project Accountant:
(210)458-6167

PURPOSE/SCOPE

Accurately record the value of assets held by university service centers for resale and to minimize the risk of loss of those assets. An inventory of goods must be conducted annually.

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

  • UTSA Management Training and Accountability Initiative


UNIVERSITY GUIDELINES

Table of Contents

A. Background

University 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 University 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, service centers must determine all of the following:

  • Beginning inventory

  • Amount of purchases

  • Ending inventory

The University utilizes periodic inventory accounting. UTSA requires that 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 is retained of the inventory valuation.

The valuation method, such as LIFO, FIFO, average cost and 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 larger quantities of inventory often maximizes financial benefits, however; large inventory levels can also result in greater risks to the University as it is subject to theft or damage, or may become obsolete 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 policies listed in the Authority section of this policy.

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 contain 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 2.5.2 Establishment and Financial Management of Authorized 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. Obsolete inventory

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

F. Physical Inventory Counts

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 the value of the inventory held in the inventory system is equal to the value in the inventory account on the general ledger.

The Inventory Reconciliation form must be signed by the department head and their supervisor, and submitted to the Assistant Vice President, Financial Affairs/Controller by the established due date.

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

The form includes the following sections:

1. Memorandum

Once the physical count has been completed and verified by the service center, the Memorandum section must be updated with the following information:

  • Names of individuals who conducted the physical count of the inventory

  • Date inventory physical count was conducted

  • Service center name and account number

2. Obsolete Inventory Adjustments

The Obsolete Inventory Adjustments section must be updated with information about obsolete inventory disposed of throughout the year. Surplus receipts must be attached and the following information must be updated.

  • Item#

  • Description of inventory (name)

  • Quantity

  • Unit Cost

  • Total Value of each item

  • Total Value of all inventory disposed

3. Inventory Reconciliation

The Inventory Reconciliation section must include the physical inventory count results and:

  • Beginning inventory value

  • Purchases for resale

  • Inventory consumed

  • Inventory disposed (obsolete)

  • Projected inventory value

  • Actual inventory at year-end

If a variance exists, an explanation must be documented by the department head.

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 the “Reserve for Inventory" (97) subaccount.

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


DEFINITIONS

Term Definition

Cost of Goods Sold

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, a historical method of recording the value of inventory is used. The first units purchased are the first units sold. FIFO accounting is in contrast to the method LIFO accounting.

Inventory

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

LIFO Valuation

LIFO is an acronym for "last in, first out. In LIFO accounting, a historical method of recording the value of inventory is used. The last units purchased are the first units sold. LIFO accounting is in contrast to the method FIFO accounting.

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.

NOTE: Sometimes referred to as Dead Inventory

Periodic Inventory Method

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

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

Inventory valuation method that takes the value of inventory for resale and divides it 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 current 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

02/17/10

Published guideline.

 


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