...OBSERVATION OF PHYSICAL INVENTORY COUNT Physical inventory counting is a much unloved procedure in most merchandising and manufacturing businesses. The process ensures that the inventory on the company's financial books matches the amount of inventory on the sales floor, stockroom or warehouse. Many businesses undergo a thorough annual inventory count, usually at the end of either the calendar or their fiscal year. Sample, or cycle, counts are often conducted between full inventory counts. Sample counts are not intended to check the entire inventory. Instead, they check a portion of the inventory listed on the books. The primary reason auditors observe their client taking the physical inventory is to make sure the inventory reflected on the balance sheet actually exists and that the balance sheet includes all inventory owned by the company. This includes all raw materials, supplies, inventory in transit when using Free on Board (FOB) shipping point, inventory the company may have on consignment with another business, and inventory stored off the premises. Confirming the existence of inventory through your observations addresses the occurrence and completeness assertions as well. However, the auditor must always bear in mind that he is there not to participate in the actual counting of inventory but to rather observe. But before an auditor can pursue this audit procedure, he must first have to gather enough information about the company under audit’s inventory procedures. Aside...
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...Red Bluff Inn and Café [1] The first issue in terms of potential fraud comes from the small amount of management that is available to oversee employee actions within the café. It is important to have individuals in place who can focus on the training and supervising of employees, who can ensure that employees are following proper protocol. The cash only moves between the employees working registers and the couple who are managing the business, so it would not be difficult for an employee to abuse this lack of controls by destroying receipts and taking cash for themselves. To combat this, Mr. Fernandez can also hire or designate an employee to specifically handle cash counts before the money transfers from the employee handling the registers to the couple. This would allow the owner to know that the cash isn’t being mishandled, as there would be records of cash both at the beginning and end of the shifts. AU Section 315 (2012) stresses the importance of segregation of duties, and creating positions that act as middle-men for money would enable this segregation by ensuring there are more unbiased individuals handling the cash each day. The second issue that arises comes from the part-time staff, and their potential chances to commit fraud. When dealing with items such as the café, you are allowing these employees opportunities to commit both fraud against your business by taking cash for personal use. For this, it is important that Mr. Fernandez put in place a strong code...
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...3 phase approach to solid inventory record system o Design of the inventory record system and creation of the internal capabilities to put into place and keep it operating o Straightforward development of initial inventory balances o Ongoing operation and control of the inv record system, where responsibilities are defined and sources of errors can be located and eliminated. • measuring inventory accuracy needs to take into account tolerance. Might miss exact number on most of the items but might fall within the % variance of each item and then no problems. Thus overall inventory accuracy = (total accurate records / total records checked) *100 = % of accuracy • dollarizing value of firms inventory may be accurate to penny but that accuracy could hide appalling level of part specific inaccuracy. • tolerances may be set based on a products: o usage o dollar value o lead time o level in the bill of material o criticality o method of handling • most companies multiply usage by value in order to compute ‘dollars spent during the year for each part’. That typically will follow 80/20 rule. 80% of dollars spent per year will be on 20% of parts. Chart would be: ▪ Cost Class Parts Puchased % $ Spent % Tolerance % ▪ A 20 80 +/-0 ▪ B 30 15 +/-2 ▪ C 50 5 +/-5 • This however ignores the velocity of...
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...Physical Inventory Guidelines Purpose This document provides guidelines for conducting annual physical inventories, and is applicable to all units that hold inventory for resale to external or internal customers. Annual physical inventories not only help ensure the accuracy of inventory balances reported in the University's financial records but also help you manage the activity in your area. While these guidelines address annual physical inventories, similar concepts apply to cycle counting, but the specific steps are different. Cycle counting is a process that uses regularly scheduled counts but does not count the entire inventory in a single event. Please contact the Controller's Office Business Operations Department at 3-0781 for guidance. The document consists of the following sections and supplemental information in the appendices. Table of Contents Purpose ...........................................................................................................1 Responsibilities ................................................................................................2 Planning for a Physical Inventory .....................................................................2 Conducting the Physical Count ........................................................................5 Reconciling the Physical Inventory ..................................................................6 Appendix ............................................................
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...and Lifecycle Management Chemical Inventory Management Benchmarking Survey Leslie Soderquist, CWI-Chemical Services October, 2007 1 Chemical Inventory Management Benchmarking Survey Purpose: To Survey members of the DOE Site community to identify current practices for the management of chemicals. Topics Covered in Survey: General Site information Chemical Inventory Management System Information Chemical Inventory Process Inventory Accuracy 2 Chemical Inventory Management Benchmarking Survey Process: - Key staff from the Sites below were contacted and provided with a survey. - Most survey’s completed with a phone interview - Completed survey’s were provided to the contact for confirmation - Survey’s tabulated on a spreadsheet Savannah River Site Argonne National Lab Sandia-NM Brookhaven National Laboratory Hanford Los Alamos Pantex Sandia-CA Oak Ridge Lawrence Livermoore Idaho National Laboratory Site Pacific Northwest National Laboratory 3 Chemical Inventory Management Benchmarking Survey Results Site Information Primary Site Function 10 of 12 sites primary function is R&D work. 2 sites indicated Manufacturing 3 sites also indicated they D&D work is a significant function Activities and Operations 12 sites have laboratory operations 3 sites have manufacturing operations 10 sites have Construction activities 8 sites have D&D activities 4 Chemical Inventory Management Benchmarking Survey Results ...
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...retail firm would normally use an inventory account titled finished goods inventory goods in process inventory raw materials inventory merchandise inventory 2. MC.07-18 A manufacturing company typically has how many inventory accounts? 1 3 2 4 3. MC.07-19 A manufacturing firm would not normally have an account titled raw materials inventory finished goods inventory merchandise inventory goods in process inventory 4. MC.07-20 Which of the following is included in the work in process account? cost of raw materials used in production manufacturing overhead direct labor cost All of these answer choices are included in the work in process account. 5. MC.07-22 A perpetual inventory system keeps a continuous record of the physical quantities of inventory on hand does not maintain a continuous record of the cost of inventory on hand does not maintain a continuous record of the physical quantities of inventory on hand only records the inventory on hand at the end of the year physical count 6. MC.07-23 Which of the following are characteristics of a perpetual inventory system? Management knows how much inventory is on hand at all times. The computer tracks inventory upon a sale and the cost of goods and inventory are immediately updated. Purchases of inventory are recorded to the inventory account. All of these answer choices are characteristics of a perpetual inventory system. 7. MC.07-25 Which...
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...Chapter 7 Inventories: Cost Measurement and Flow Assumptions Classifications of Inventory Raw Materials Inventory – includes the tangible goods acquired for direct use in the productions process. Goods in Process Inventory – includes the products that have been started in the manufacturing process but have not yet been completed. The partially completed inventory includes three cost components: 1) raw materials 2) direct labor, which is the cost of the labor used directly in the manufacture of the product, and 3) manufacturing (or factory) overhead, which includes the costs other than raw materials and direct labor that are associated with the manufacturing process. It includes: a. variable manufacturing overhead (ex. Supplies and indirect labor) b. fixed manufacturing overhead (ex. Insurance, utilities, and depreciation) Finished Goods Inventory – includes the completed manufactured products awaiting sale. Alternative Inventory Systems Perpetual System – maintains a continuous record of the physical quantities in its inventory. It records the purchase, or production, and use of each item of inventory in detailed subsidiary records, although often only in units without including costs. Periodic Inventory System – a company using a periodic system does not maintain a continuous record of physical quantities (or costs) of inventory on hand. It takes physical counts periodically, which should be at least once a year and generally at the end of the...
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...Transaction Authorization PURCHASES SUBSYSTEM. The inventory control function continually monitors inventory levels. As inventory levels drop to their predetermined reorder points, inventory control formally authorizes replenishment with a purchase requisition. Formalizing the authorization process promotes efficient inventory management and ensures the legitimacy of purchases transactions. Without this step, purchasing agents could purchase inventories at their own discretion, being in a position both to authorize and to process the purchase transactions. Unauthorized purchasing can result in excessive inventory levels for some items, while others go out of stock. Either situation is potentially damaging to the firm. Excessive inventories tie up the organization’s cash reserves, and stock-outs cause lost sales and manufacturing delays. Segregation of Duties SEGREGATION OF INVENTORY CONTROL FROM THE WAREHOUSE. Within the purchases subsystem, the primary physical asset is inventory. Inventory control keeps the detailed records of the asset, while the warehouse has custody. At any point, an auditor should be able to reconcile inventory records to the physical inventory. Supervision In the expenditure cycle, the receiving department is the area that most benefits from supervision. Large quantities of valuable assets flow through this area on their way to the warehouse. Close supervision here reduces the chances of two types of exposure: (1) failure to properly inspect the...
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...Inventory is a quantity of goods owned and stored by a business that is intended either for resale or as raw materials and components used in producing goods that the business sells. For example, motherboards warehoused at a computer company to be used in the assembling of its computer systems are inventory. The products displayed for sale and stored in the backrooms of a department store are inventory as well. Inventory is the heart beat of any business and its management is a major interest of purchasing managers. Operations managers usually have an indecisive attitude towards inventories as it can be costly. Since for many companies inventory is the largest item in the current assets category, inventory problems can and do contribute to...
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...disadvantages of accounting for inventory under the perpetual inventory system The major difference between the two methods of recording for inventory accounting systems (perpetual and periodic) is the extent to which stock movements are monitored. The physical system of recording for inventory does not keep records of the movements of stock. The only information in the ledger concerning merchandise is the recording in the stock account of the total inventory determined by a physical stock-take at the end of each accounting period. However, under the perpetual inventory method, individual items of merchandise are recorded on stock cards and a stock control account is kept continuously up to date by recording movements of all inventories into and out of the business. Perpetual inventory involves keeping records of all stock movements throughout the accounting period. (It is also known as the continuous inventory method.) This method updates the balance of stock on hand on a continuous basis throughout the period allowing a greater control over stock. Every time stock moves in or out of the business, the inventory balance is updated. When stock is purchased, the balance is increased. When sales are made, the balance will be decreased. Sales returns have the effect of increasing stock on hand and purchase returns decrease the stock on hand. Withdrawals of inventory by the proprietor must also be accounted for, as this will decrease the balance of stock. As inventory is always recorded at...
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...Financial flexibility– the ability to use its financial resources to adapt to change. Liquidity- the availability of a company’s liquid assets to pay its bills. Cash- the resource on hand to meet planned payments and emergency situations. (current assets includes coins, currency, unrestricted funds on deposit with a bank, negotiable checks, and bank drafts) Cash equivalents- short term highly liquid investments that are readily convertible into known amounts of cash. Cash planning systems- methods and procedures that a company uses to ensure that it has adequate cash available to meet maturing obligations. Cash control systems- methods a company uses to safeguard its funds. Cash budget- a plan of cash activity that forecasts cash receipts and payments, and identifies when the company might have too much or too little cash. Internal control- the process a company uses so that its financial reports are reliable, its operations are effective/efficient, and it complies with laws/regulations. Electronic funds transfers-finds are transferred between companies electronically without the need for a check. Compensating balances-a required deposit to the bank for compensating them for granting the loan. Current assets- receivables expected to be collected within one year or the current operating cycle, whichever is longer, the rest is classified as Noncurrent. Trade receivables- the majority of a company’s total receivable balance. Account receivable- non-written promises by customers to...
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...period by a production department [pic]number of whole units that could have been completed if all work of the period had been used to produce whole units [pic]identifiable units existing at the end of the period in a production department 5. In a process costing system using the weighted average method, cost per equivalent unit for a given cost component is found by dividing which of the following by EUP? (Points: 1) [pic]only current period cost [pic]current period cost plus the cost of beginning inventory [pic]current period cost less the cost of beginning inventory [pic]current period cost plus the cost of ending inventory 6. The difference between EUP calculated using FIFO and EUP calculated using weighted average is the equivalent units _______. (Points: 1) [pic]started and completed during the period [pic]residing in beginning Work in Process Inventory [pic]residing in ending Work in Process...
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...Inventory Auditing Inventory Auditing Inventory is tangible goods held by a company to support production, support activities or for sale or customer service. They are comprised normally of parts, tools, maintenance supplies, raw materials, work in progress, finished goods and waste or by-products (Inventory, 2012). Inventory is often the main item in the current assets category, and must be accurately counted and valued at the end of the accounting period to ascertain a company's profit or loss. Organizations whose inventory items have a bigger unit cost often keep a daily record of changes in inventory (perpetual inventory method) to ensure accurate control. Similarly, companies with smaller inventory item cost most often update inventory records at the end of an accounting period (periodic inventory method) (Inventory and COGS, 2012). The value of an inventory depends on the valuation method used, such as first-in, first-out (FIFO) method or last-in, first-out (LIFO) method (Inventory and Cost of Goods Sold, 2012). Generally Accepted Account Principles require that inventory should be valued on the basis of either its cost or its current market price, whichever is lower to prevent overstating of assets and earnings due to an increase in the inventory's value in inflationary periods (Section 3140: Inventory, 2012).. Methods Inventory audits usually start when auditors meet with a company’s owner or manager. Auditors will discuss the company’s...
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...is 120% of direct labor cost. For example, on July 15, the computation is $528 ÷ $440 = 120%. The same result is obtained on July 22 and 31. (3) The total cost is: Direct materials $4,825 Direct labor 1,360 Manufacturing overhead 1,632 $7,820 The unit cost is $3.91 ($7,820 ÷ 2,000). (b) July 31 Finished Goods Inventory 7,820 Work in Process Inventory 7,820 E2-9 At May 31, 2005, the accounts of Yellow Knife Manufacturing Company show the following. 1. May 1 inventories—finished goods $12,600, work in process $14,700, and raw materials $8,200. 2. May 31 inventories—finished goods $11,500, work in process $17,900, and raw materials $7,100. 3. Debit postings to work in process were: direct materials $62,400, direct labor $32,000, and manufacturing overhead applied $48,000. 4. Sales totaled $200,000. Instructions (a) Prepare a condensed cost of goods manufactured schedule. (b) Prepare an income statement for May through gross profit. (c) Indicate the balance sheet presentation of the manufacturing inventories at May 31, 2005. (a) YELLOW...
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...Student Name: | Topic Reflected on: Inventory | | Date: 3/22/2015 | | Discuss important issues an accountant must consider when accounting for inventory. Make sure you explain why it is an issue.An issue an accountant must consider is whether the goods that are in transit belong to the company in inventory or the customer. This issue is related to ownership of the goods to decide whether a sale has occurred or if it remains in inventory at the end of the period. Accountants must also consider the issue of valuing of inventory. This is an issue because records must be kept consistent when recording inventory so that it is fairly valued in accordance with the accounting method chosen such as, FIFO, LIFO, or weighted average method to determine the value of inventory. The inventory method chosen can results in different amounts for the cost of goods sold. Inventory detail can be an issue as it must be accurate related to FIFO and LIFO so when selling units the correct per price point is used for each method. Shrinkage costs can be an issue if the difference in current inventory costs are drastically different from the physical count. A drastic difference means there is high human error or theft of inventory. Determining which method will affect the income of a company and the taxes a company has to pay can be an issue depending on the company. If a company is trying to pay lower income taxes, the method chosen is directly related to the economic environment. Lower...
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