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Business and Financial Policies and Procedures

Methods of Merchandise Inventory Valuation

The two systems for maintaining merchandise inventory are periodic and perpetual. Self-supporting units must use a perpetual inventory system unless they have received an exemption to use the periodic inventory system. Consult Request an Exemption from Using a Perpetual Inventory System for details. There are also two University-approved methods for determining the monetary value of merchandise inventory:

  • First In, First Out (FIFO) - Required for periodic inventories, can also be used for perpetual
  • Moving Average - Can be used for perpetual, never for periodic

Periodic Inventory

Periodic inventories do not maintain an ongoing balance of the quantities and overall valuation of the inventory on hand. The amounts on hand and valuation are only determined at the point a physical inventory is taken. That valuation is used to update the inventory balance in the Banner General Ledger.

Perpetual Inventory

Perpetual inventories maintain an ongoing balance of the quantities and overall valuation of the inventory on hand. This is done by keeping detailed records of each item held in stock and increasing the quantity and valuation of the item when stock is purchased or otherwise added, and reducing the quantity and valuation of each item when stock is sold or returned to vendors.

Units starting a new operation that requires inventory for resale should determine whether their unit's business need is best met using the FIFO or the Moving Average valuation method. They may consult with other units that are using either of these methods, or consult with University Accounting and Financial Reporting (UAFR). Changes from one valuation method to the other require approval in writing from UAFR.

FIFO Method

The first items of merchandise purchased are considered, for valuation purposes, to be the first items of inventory sold. That means the items remaining in the inventory are assumed to be the items most recently purchased. They are therefore valued using acquisition prices from invoices for the items most recently purchased, then proceeding to invoices from each succeeding older purchase, until the quantity on hand has been accounted for and valued.

Example of FIFO calculation:

 Date  Purchased  Sold/Issued  Inventory Value
March 2 2,000 @ $4.00 = $8,000   2,000 @ $4.00 = $8,000
March 15 6,000 @ $4.40 = $26,400   2,000 @ $4.00 and
6,000 @ $4.40 = $34,400
March 19   2,000 @ $4.00 and
2,000 @ $4.40 = $16,800
4,000 @ $4.40 = $17,600
March 31 2,000 @ $4.15 = $8,300   4,000 @ $4.40 and
2,000 @ $4.15 = $25,900

In the example above, if you were to conduct a physical inventory on March 31, your count of items on hand should confirm that there are 6,000 items remaining in the merchandise inventory, as shown in the March 31 line of the perpetual record.

Perpetual Inventory System - If the physical inventory count does not match the total shown in your perpetual inventory system, adjust your perpetual inventory record to agree with the physical count of items on hand, and also adjust the Banner General Ledger to agree with the total value of your unit's perpetual record.

Periodic Inventory System - If the valuation based on your physical inventory count does not equal your Banner General Ledger balance, then adjust the General Ledger balance to agree with the results of your physical inventory.

For detailed instructions on physical inventory valuation, consult Conduct a Physical Inventory to Adjust Your Merchandise Inventory Record.

Moving Average Method

Items on hand are considered, for valuation purposes, to be a mixture of purchases over time, and therefore the value is assumed to be an average of values for those items in stock. Therefore, an average unit price is computed for each item in stock and applied to the number of items in stock. The inventory value at a given point in time is calculated as the sum of the cost of the most recent purchases plus the value of existing inventory. The new unit price is determined by dividing the total inventory value by the total quantity of inventory items that your perpetual record shows you have on hand.

Example of Moving Average calculation:

 Date    Change  Items  Amount  Value  Average $ per Unit
March 2 + Initial purchase 50 items at $4.00 = $200.00  
March 8 - Sales 20 items at $4.00 = $ 80.00  
    Current Inventory 30 items   = $120,00 $4.00
March 10 + Inventory purchase 20 items at $3.00 = $ 60.00  
    Current inventory 50 items   = $180.00 $3.60
March 15 - Return to vendor 4 items at $3.00 = $ 12.00  
    Current inventory 46 items at $3.65 = $168.00 $3.65
March 17 + Return from customer 5 items at $3.65 = $ 18.25  
    Current inventory 51 items   = $186.25 $3.65
March 22 + Inventory purchase 10 items at $2.50 =$ 25.00  
    Current inventory 61 items   = $211.25 $3.46
March 31 - Sales 45 items at $3.46 = $155.70  
    Current inventory 16 items   = $ 55.55 $3.47

In the example above, a physical inventory count on March 31 should validate that there are 16 items remaining in the merchandise inventory.

If the physical inventory count does not match the total units shown in your perpetual inventory system, adjust your perpetual inventory record to agree with the physical count of items on hand, and also adjust the Banner General Ledger to agree with the total value of your unit's perpetual record using the most current computed average value per unit. For detailed instructions, consult Conduct a Physical Inventory to Adjust Your Merchandise Inventory Record.

Last Updated: January 1, 2013 | Approved: Senior Associate Vice President for Business and Finance | Effective: January 2013

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