Before inventory purchases are recorded, the receiving report should be reconciled to what documents

Chapter 5—The Expenditure Cycle Part I: Purchases and Cash Disbursements

Procedures

TRUE/FALSE

1.Purchasing decisions are authorized by inventory control.

ANS:T

2.The blind copy of the purchase order that goes to the receiving department contains no item

descriptions.

ANS: F

3.Firms that wish to improve control over cash disbursements use a voucher system.

ANS:T

4.In a voucher system, the sum of all unpaid vouchers in the voucher register equals the firm’s total

voucher payable balance.

ANS:T

5.The accounts payable department reconciles the accounts payable subsidiary ledger to the control

account.

ANS:F

6.The use of inventory reorder points suggests the need to obtain specific authorization.

ANS:F

7.Proper segregation of duties requires that the responsibility approving a payment be separated from

posting to the cash disbursements journal.

ANS:T

8.A major risk exposure in the expenditure cycle is that accounts payable may be overstated at the end of

the accounting year.

ANS:F

9.When a trading partner agreement is in place, the traditional three way match may be eliminated.

ANS:T

10.Authorization of purchases in a merchandising firm occurs in the inventory control department.

ANS: T

11.A three way match involves a purchase order, a purchase requisition, and an invoice.

Need Help?

If you have questions about inventories, contact Accounting.

Inventory is an asset and it is recorded on the university’s balance sheet. Inventory can be any physical property, merchandise, or other sales items that are held for resale, to be sold at a future date. Departments receiving revenue (internal and/or external) for selling products to customers are required to record inventory. A physical inventory must be done annually.

Steps in this Process

1. Establish a Sales Operating Account
2. Establish an Inventory Tracking System
3. Establish Physical Inventory Controls
4. Purchase and Receive Goods for Resale
5. Record Transactions for Goods Sold
6. Perform a Physical Inventory
7. Adjust the General Ledger Inventory Balance

Establishing a Sales Operating Account (Current Fund, GNDEPT)

The sales operating account is used to record sales of inventory to customers, reconcile inventory value after performing a physical inventory, and record other expenses related to the sale and operation of the inventory.

Use an Inventory Object Code (Asset)

The Inventory object code (asset) is used to record inventory value, reconcile inventory value after a physical inventory is performed, and transfer cost of goods sold to the inventory operating account.

Note: See the object code list below for a detailed list of object codes (with their names and descriptions) used to record and adjust your inventory and cost of goods sold.

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Establishing an Inventory Tracking System

Generally, units should have an inventory accounting system that tracks purchases and sales of the units’ inventory and allows units to calculate cost of goods sold, which must be transferred to the operating account. Inventory purchases are recorded on the operating account with an Inventory object code, and sales are recorded on the operating account with the appropriate sales object code. A cost-of-goods-sold transaction is used to transfer the cost of goods sold to the operating account.

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Establishing Physical Inventory Controls

Safeguard your inventory. Limit access to inventory supply and implement procedures for receiving and shipping. Ensure that all employees responsible for inventory control and accounting entries are knowledgeable about the products and items inventoried.

Storage areas should be locked when operations are closed. High-dollar items should be secured with locks separate from the common storage area. Label and store inventory in a manner that allows you to easily access items and determine the quantity on-hand. Separate and note obsolete or damaged products and record waste or damaged products on a waste sheet.

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Purchasing and Receiving Goods for Resale

Goods for resale are purchased through the purchase order process (follow purchasing procedures). When goods are received, the packing/receiving slip should match the invoice and materials you received. Reconcile the Inventory object code for products received to invoices received.

Inventory purchases are recorded as a charge (debit - D) in the sales operating account on an Inventory object code.

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Recording Transactions for Goods Sold 

When goods are sold, properly record the transactions and ensure that the correct items are billed and shipped to customers. Record sales in the sales operating account with the appropriate sales object code. Transfer the inventory cost of goods sold to the operating account using a cost of goods sold transaction.

Recording Sales to Internal Customers

Process the transaction on an Internal Billing (IB) e-doc to credit interdepartmental income on your operating account and debit an interdepartmental expense in the purchasing department’s account. This will show income (credit - C) to the operating account and an expense (debit - D) to the customer’s account that is receiving the inventory.

Recording Sales to External Customers

When selling inventory to a non-Cornell entity or individual for cash/check, record it on your operating account with a credit (C) to sales tax and external income and debit (D) to cash. When selling inventory and recording an accounts receivable, use an accounts receivable object code.

Calculating and Recording the Cost of Goods Sold 

Cost of goods sold is the value (cost) of what you have sold and is calculated as follows:

Beginning Inventory + Purchases – Ending Inventory = Cost of Goods Sold

Profit is the difference between sales and cost and is calculated as follows:

Sales – Cost of Goods Sold = Gross Profit

The time period for making these calculations needs to be the same. The calculations can be done weekly, monthly, quarterly, or yearly depending on the volume of your transactions; however, all transactions must be completed by June 30.

Record the cost of goods sold by reducing (C) the Inventory object code for products sold and charging (D) the Cost of Goods Sold object code in the operating account.

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Performing a Physical Inventory

A physical inventory must be done annually. Conducting an accurate physical inventory is a vital component to creating an accurate, consolidated balance sheet at the university level. The physical inventory results directly impact the unit’s cost of goods sold, revenue, and profit, and ultimately, the information presented on the university’s financial statements.

1. Suspend receiving and shipping operations during physical inventory.
2. Use inventory-tracking sheets to make counts.
3. Conduct the physical inventory with at least two people. A third person can spot-check completed inventory sheets.
4. Include items that have a zero count.
5. Do not include obsolete or damaged items or items that have been sold but not shipped or received but not recorded.
6. Mark items as you count them, so that you do not count them twice.

After a physical inventory is completed, record the adjusting entries to the general ledger. Retain an electronic copy of the physical inventory along with the completed physical inventory reconciliations, and keep these copies available for internal and/or external auditors.

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Adjusting the General Ledger Inventory Balance

After each physical inventory, adjust the general ledger inventory balance to the physical “actual” inventory balance. Your inventory tracking system should be tracking the inventory book balance.

Correcting Inventory Shortages

Inventory shortage occurs when there are fewer items on hand than your records indicate, and/or you have not charged enough to the operating account through cost of goods sold.

To correct a shortage, reduce (C) the balance on the Inventory object code and increase (D) the Inventory Over/Short object code in the sales operating account.

Consider the following to decrease the chance of an inventory shortage:

• What occurred to make the physical inventory value less than book inventory?
• When items were received/recorded, was their value less than was recorded?
• When items were sold/shipped, was their value greater than was recorded?
• Is there a chance that the error occurred due to employee theft?

Correcting Inventory Overages

Inventory overage occurs when there are more items on hand than your records indicate, and you have charged too much to the operating account through cost of goods sold.

To correct an overage, increase (D) the balance on the Inventory object code and reduce (C) the Inventory Over/Short object code in the sales operating account.

Consider the following to reduce the chance of an inventory overage:

• What occurred to make the physical inventory value greater than book inventory?
• When items were received/recorded, was their value greater than was recorded?
• When items were sold/shipped, was their value less than was recorded?

Recording Inventory Devaluation

Inventory devaluation reduces (C) the Inventory object code for the devaluation of goods not sold over time and increases (D) the Cost of Goods Sold object code in the sales operating account.

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Object Code List

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Why is it important to take a physical inventory periodically when using a perpetual inventory system?

At what value are inventory items reported on the balance sheet?

Under which method of inventory costing is the ending inventory assumed to be composed of the most recent costs?

Under which method of inventory costing is the ending inventory assumed to be composed of the most recent costs quizlet?