ctcLink Accounting Manual | 40.35 Inventories and Prepaid Expenses

The district president/chancellor must designate, in writing, one or more employees to be responsible for maintaining and safeguarding the district's inventories. These responsibilities include:

1. Selecting appropriate inventory accounting methods and systems from acceptable alternatives (refer to Subsection 40.35.10.2 and 40.35.10.3);
2. Developing and implementing policies and procedures to safeguard, control, and account for inventories;
3. Defining inventory control point in the agency's written internal policies;
4. Planning, conducting, and reconciling the physical inventory with inventory records;
5. Documenting selected inventory valuation methods;
6. Documenting physical inventory procedures; and
7. Performing other duties necessary to account for and report inventories.

The state allows colleges to use any of three valuation methods:

1. First-in, First-out (FIFO) - This method allocates costs on the assumption that goods are consumed/sold in the order in which they were acquired. In other words, the first goods purchased are assumed to be the first used or sold. Thus, inventory on-hand is assumed to represent the most recent acquisitions.
2. Last-in, First-out (LIFO) - This method allocates costs on the assumption that the last units acquired are the first units consumed/sold. Thus, inventory on-hand is assumed to come from earlier acquisitions.
3. Weighted Average (W.A.) - In general, this method values ending inventory based on the average cost per unit for the period.

Consumable merchandise, raw materials or work in progress inventories must be physically counted, valued, and recorded in the general ledger when the fiscal year-end balance on-hand at an inventory control point exceeds $50,000.

The state allows colleges to use either of two inventory systems:

Perpetual Inventory System

This method uses the inventory quantities and values for all purchases and issues are recorded directly in the inventory system as they occur. Perpetual inventory system balances are verified by means of periodic physical counts. A revolving physical count, where segments of inventories are counted at different times, may be used, provided all inventories are counted at least every other fiscal year.

The agency inventory officer is responsible for developing and implementing procedures for recording inventory additions as received and reductions as used.

Periodic Inventory System

This method avoids the necessity of accounting for each addition to and deletion from inventory. Instead, the agency performs a physical count of its inventory at least annually at fiscal year-end. It then costs the inventory according to generally accepted accounting principles and adjusts the accounting records to reflect this cost. When this system is used, the agency must maintain a system for documenting the inventory unit costs used in determining the cost.

1. If possible, physical inventory counts should be performed by persons with no direct responsibility for the inventory.  If that is not possible, then the inventory counts must be spot-checked by a person with no direct responsibility for the inventory.
   Physical inventory instructions must be documented and distributed to individuals involved in the physical count.
2. Perpetual inventory records must be reconciled with the physical count. The district must investigate and explain differences, take corrective action when necessary, and adjust the accounting records. When the reconciliation is complete, the college inventory officer must certify in writing that the inventory was verified by counting and reconciliation.
3. Under the periodic inventory system, the physical inventory listing resulting from the physical count constitutes adequate documentation of the inventory. After the count is complete, the process is one of calculation rather than reconciliation.
   The inventory units are to be assigned a cost according to the method selected, the total cost of the inventory is to be calculated, and the appropriate accounting adjustments are to be made.
4. The district inventory officer must certify in writing that the inventory was verified by an actual count.

The inventory reconciliation and certification must be retained by the district as documentary support for its inventory. The district should retain this documentation in accordance with community and technical college system approved records retention schedules.