Note: These procedures are not applicable to equipment asset inventory (refer to Guide Chapter 16: Equipment and Furnishings Assets).
Inventory is a physical asset that is held for sale and whose value is determined annually.
Note: The University does not record inventory for items held for consumption (i.e. items that are not for resale or used in production of items for sale).
Units Required to Account for Inventory
These procedures are applicable only to units that conduct regular selling activity in the course of their operations and whose inventory value is regularly a minimum of $100,000.
Units planning to start a new activity that will involve the sale of inventory items must contact Financial Services.
Inventory Unit Responsibilities
Inventory units are responsible for:
- developing procedures to effectively manage inventories and safeguard inventory from loss due to damage, theft and obsolescence. Inventory units may be requested to provide these procedures to auditors.
- maintaining detailed inventory records including tracking inventory costs and inventory additions and sales (“ins” and “outs”), in order to generate an inventory list for accounting purposes
- verifying inventory levels through inventory counts
- within the Year-end Schedule timeline, providing a Certificate of Inventory to Financial Services, who will process the inventory adjustment
Accounting for Inventory Costs
As the activities related to the sale of inventory are of an operating nature, inventory costs are recorded in operating funds.
Inventory costs generally include:
- purchase of products for resale (e.g. books, supplies, animals)
- production of items for sale (e.g. course packs)
- supplies used to add value to items to be sold (e.g. animal care costs) and materials used in the course of providing services that are sold
Units must track inventory-related expenses in a manner that enables them to calculate the cost of inventory on hand at fiscal year-end. Cost of Goods Sold (COGS) accounts (506xxx account range) are used to record inventory-related expenses.
Inventory units are required to complete an inventory count at year-end.
To ensure the inventory count is accurate and complete, the following procedures must be followed:
- Inventory should be counted by two individuals; one individual to count the items and the second to observe and record the count.
- All goods owned by the unit, and stored in any of its locations, must be counted. Goods in transit to the university must be included in inventory if the unit bears the responsibility for these goods when they leave the vendor's premises (i.e. FOB Shipping Point or FOB Origin).
- Goods in transit from the unit to a customer must be included in the inventory count if the unit will record the sale in the next fiscal year (i.e. process the billing or cash deposit).
- Inventory items that appear to be obsolete, damaged or otherwise unsellable must be noted.
- Following the count, inventory records must be updated to reflect actual inventory (i.e. inventory on hand) as of close of business on the last day of March. Access to updating inventory records should be available only to a senior level of staff that is not involved in performing the inventory count.
For the purposes of maintaining up-to-date records for accounting, insurance and effective inventory management, units are expected to develop and maintain their own (internal) detailed inventory counting procedures.
Determining Inventory Value at Fiscal Year-End
Inventory units are required to determine the total value of their inventory at each fiscal year-end, based on the updated inventory list after performing the year-end inventory count.
Inventory value is based on the value of physical items related to the sale or products and services including:
- products purchased with the intention to resell to internal and/or external customers
- products produced, or in the process of production, with the intention to sell
- materials or supplies to be used to produce products to be sold, or to provide services for a fee
Units must use an appropriate and consistent method for determining the cost per unit of their inventory (e.g. first-in first-out (FIFO), or weighted average cost). Financial Services recommends using weighted average cost as it equally allocates the total cost of like items held in inventory to each item. The cost of work-in-progress is included in the unit cost.
Units must determine their inventory value upon completion of the inventory count as follows:
- Inventory is valued at the lower of cost or net realizable value (NRV). If the cost per unit of inventory exceeds the price at which the item can be sold, the unit must determine the net realizable value (NRV) per unit (selling price less any costs related to the sale). For example, obsolete, damaged, or slow-moving inventory must be valued at net realizable value if NRV is lower than the cost per unit.
- After determining the appropriate value per unit of inventory, the unit calculates the value of each inventory item and the total value of the inventory.