Inventories LO 1 – Controlling Inventory

LO 1 Control of Inventory Two primary objectives of control over inventory are: Safeguarding the inventory from damage or theft. Reporting inventory in the financial statements. The two objectives of internal control over inventory are: (1) safeguarding or protecting the asset inventory and (2) properly reporting it in the financial statements.

Safeguarding Inventory LO 1 Safeguarding Inventory The purchase order authorizes the purchase of the inventory from an approved vendor. Control over inventory begins as soon as the inventory is ordered. The purchase order authorizes the purchase of the inventory from an approved vendor. It includes quantity to purchase, the price, and a description of the item purchased.

Safeguarding Inventory LO 1 Safeguarding Inventory The receiving report establishes an initial record of the receipt of the inventory. The receiving report establishes an initial record of the receipt of the inventory. A receiving report is completed by an employee in the receiving department when the inventory is received. The employee lists each item received and the quantity received on the report. Another employee will compare the receiving report to the original purchase order, to assure that the goods received are exactly what was ordered. The purchase order will also be compared to the vendor’s bill to make sure the correct price was charged. All of these steps are part of an effective system of internal control over inventory.

Safeguarding Inventory LO 1 Safeguarding Inventory Controls for safeguarding inventory should include security measures to prevent damage and customer or employee theft. Some examples of security measures include the following: Storing inventory in areas that are restricted to only authorized employees. Locking high-priced inventory in cabinets. Using two-way mirrors, cameras, security tags, and guards. Other important controls include protecting the inventory from damage and from customer or employee theft. Many companies install security systems to safeguard their inventory, which is a valuable asset.

Safeguarding Inventory LO 1 Safeguarding Inventory Using a perpetual inventory system for merchandise also provides a means of control over inventory. Using a perpetual inventory system provides better internal control over inventory than using a periodic system. When a perpetual system is used, a business has a constant and up-to-date record of the quantity of goods in inventory and the cost of goods sold.

Safeguarding Inventory LO 1 Safeguarding Inventory Recording inventory using a perpetual inventory system is also an effective means of control. The amount of inventory is always available in the subsidiary inventory ledger. When a perpetual inventory system is used, the quantity of goods on hand is maintained in a subsidiary inventory ledger.

LO 1 Reporting Inventory A physical inventory or count of inventory should be taken near year-end to make sure that the quantity of inventory reported in the financial statements is accurate. Even when using a perpetual system, an annual count of inventory is taken. This verifies that the balance of the inventory records agrees with the actual amount of inventory on hand.

LO 1 Reporting Inventory Most companies take their physical inventories when the inventory levels are the lowest. For many firms, this would be late January or early February before restocking for spring. Usually the physical count of inventory is completed when stock is at its lowest. Typically, this is after the busiest season is completed. For many retailers, this occurs in either late January or early February.