Chapter 8 - Physical Inventory

Chapter 8 - Physical Inventory The determination of inventory quantity by actual count. Physical inventories can be taken on a continuous, periodic or annual basis - ANS Physical Inventory An essential process for which the property mgr is responsible - ANS The inventory The role of the physical inventory is - ANS to ensure the assets records in the property system physically exist -to determine if unrecorded or improperly recorded transactions have occurred -to identify excess, defective, or obsolete assets on hand This requirement is governed by various regulations including - ANS -Sarbanes Oxley for corporate - Governmental Accounting Standards Board (GASB) requirements for state and local governments and public universities -Joint Financials Mgmt Improvement Program (JFMIP) for federal agencies -Federal Mgmt Regulation (FMR) for DoD -FAR for government contracts Accurate financials statements including asset value are critical for validating the accuracy of - ANS the capital fixed asset portion of an orgs financials statement. Physical inventory serves to validate the effectiveness of - ANS the org or government property management system Certain conditions dictate conducting a physical inventory. - ANS most gov agencies are subject to regulations that dictate the frequency of physical inventories The frequency and type of inventory will vary based on - ANS -risk -value -reporting requirements -inventory objectives If equipment or consumable items are provided on contract, the agency is rightfully interested in ensuring - ANS the equipment has been effectively controlled and -consumables were used at a reasonable rate. It is a factor in the decisions surrounding corporate takeovers, mergers and the restructuring of companies because the value of a company's equipment and consumable items may significantly affect its total value. - ANS A physical inventory is a strong indicator of - ANS the effectiveness of the company's property management system as well as means to verify the condition that will be included in the transaction There are appraisal firms whose primary purpose is to conduct inventories of - ANS tangible & intangible assets to assist corporate executives in making best possible business decisions Other financial purposes of an inventory are related to - ANS taxation and depreciation. Depreciated property and plant equipment inventory values are a major factor in computing fed, state, and local taxes because - ANS the taxes on inventory are based on inventory value. The property manager must ensure assets being depreciated are - ANS physically on hand Significant discrepancies in count may indicate - ANS theft, poor security, inadequate documentation of receipts and issues, or a multitude of other problems in controlling assets. Location errors indicate - ANS potential problems in documenting movement, inadequate training of property custodians, or poor record keeping location finding equipment that has not been posted to the property mgmt system may indicate - ANS inadequate interfacing with procurement, lax procurement practices on the part of staff, or failure to report the acquisition of assets Property not located at the conclusion of inventory reconciliation may indicate - ANS problems in movement or disposition processes, or a lack of interest or training in caring for the property by users and or property custodians Another value of physical inventory is verifying good records and completing - ANS or correcting inadequately maintained records. Can still be used to determine if property is still being used or is available for reutilization, and if it is in serviceable condition. Organizations can more confidently do contingency or capacity planning when such planning is based on an accurate - ANS physical inventory When conducting an inventory of computers, - ANS system configuration can also be validated Total value gained from well managed physical inventories that have been conducted at the appropriate intervals will usually - ANS far outweigh their cost and the disruption they cause For equipment and certain other items, inventory frequency is largely determined by - ANS the type of property to be inventoried. THESE inventories are conducted at predetermined intervals. - ANS Periodic inventories Periodic inventories are based on the - ANS type location value of property reliability of the property mgmt system Periodic inventories can take - ANS the entire period or a short period of time Continuous or cyclical inventory (Inventory by exception) - ANS Every time property touches a piece of equipment, including maintenance, it gets inventoried. Near the end of the inventory cycle, a report is run of all assets that have not been updated during the inventory period, and these items become the exception that must be located in order to complete the inventory. Equipment that moves frequently is more prone to loss (not reflected in the record) - ANS Roving Equipment. Best way to handle roving equipment and pilferable items is - ANS inventory by exception Portable computers, photographic equipment, and similar items of property move frequently and are considered pilferable, requiring specific control measures - ANS Pilferable. Inventory frequency based on type of equipment - ANS property may require more frequent inventory due to its material content, sensitivity, potential for theft, or because it requires special control measures. Items that become obsolete after a few years require - ANS frequent inventory since they are usually part of a replacement plan. Inventory frequency and security - ANS There is less potential for theft or loss if the property is used in a secure area Some orgs have limited security, property moves often, no restrictions on entry of staff or visitors, such as Universities. They need this type of inventory - ANS frequent, random inventory validations are advised in these types of environments. Consumables should be inventoried - ANS periodically and by quantity and compared to quantities shown in the record Generally, when systems fall below a 95% accuracy level, system integrity is - ANS jeopardized TYPES of inventories - ANS Contract Termination Inventory Wall to Wall ABC inventories Statistical Sampling If property to be inventoried is associated with a contract, a 100% inventory must be conducted at the end of the contract and property disposed of in accordance with contract provisions. Contract remains open until all assets have been accounted for and have been properly disposed of or transferred. - ANS Contract Termination Inventory Scheduled inventory of all items within an identified area. - ANS Wall to Wall This type of inventory is recommended only when the range and depth of stock is small and a complete inventory can be easily performed. May also be required if a statistical sampling resulted in failure - ANS Wall to Wall This method of cycle counting is popular because it emphasizes conducting inventories of the most critical items the most often - ANS ABC Inventories A items are identified as the highest cost or most critical, which may include such factors as - ANS -high usage -critical to production process -long lead time -fabrication to specs B items are - ANS lower in cost and or usage than A, but critical to manufacturing/production C items are - ANS typically low cost and or usage items or perhaps items readily available locally An aspect of addressing inventory cost/benefit issues is deciding how many - ANS different items out of the entire inventory must be coutned Performing a 100% inventory may not be cost effective for - ANS low cost consumable items while anything less would involve too much risk when the items are costly, difficult to acquire, or critical A certain number of items are sampled, and the results of the sample are taken to represent - ANS the entire inventory. The smaller the sample - ANS the higher the risk After initial inventory pass, - ANS at least 10% of items in each area should be verified independently Must be contingency plans to handle - ANS the unatncipated occruences During planning, inventory planners should meet with coordinators, inventory takers, supervisors and users and all participants must - ANS agree to the plan and schedule Most critical element in conducting hte inventory is - ANS following the plan to the letter Inventory coordinators are responsible for - ANS ensuring the number of assets to be inventoried is reasonable and sufficient personnel are available to complete the inventory in the allotted time no items are to be moved or transferred, nor any records updated, until - ANS the inventory in that area has been taken and validated by quality assurance Most important phase of inventory - ANS reconciliation For consumable items reconciliation is - ANS a comparison of two sets of records For assets, reconciliation is - ANS the location, notification of the accountable org, and posting of items not found during the initial inventory If the asset is under contract provisions, the - ANS contracting officer or delegated rep must approve the adjustments success of property manager is often based on - ANS the results of inventories at end of inventory, send - ANS a report in accordance with the contract, or to mgmt if not under contract The amount of data to be collected in an inventory is usually determined by - ANS the confidence the property manager has in the property mgmt system When an outside firm is hired to conduct an inventory, the property mgr must - ANS closely monitor their process, support their activities with knowledgeable staff conduct quality assurance verification of their results A successful inventory is - ANS an accurate, highly visible barometer of a sound efficient property mgmt system Role of the physical inventory is to - ANS ensure the assets recorded in the system physically exist, to determine if unrecorded or improperly recorded transactions have occurred, and to identify any excess, defective, or obsolete assets things that must be considered and measured agianst the cost and disruption of an inventory - ANS asset value degree of sensitivity (hazardous) facilities security pilferability When property can be tracked by maintenance or calibration records, moves and other records transactions, what is the prefered method of inventory - ANS inventory by exception a means of avoiding problems and as a way of immediately and effectively solving them - ANS quality assurance