Re: Off-Topic: Accounting question

Mike Mascari wrote:
>I have a quick accounting question. In the evaluation of Cost of
>Goods Sold, one can use 3 different methods for evaluating
>inventory: LIFO, FIFO, or Average Warehouse cost. In an application
>which allows the user to adjust inventory quantities, if the user
>discovers that the physical inventory in a cycle count is less than
>the electronic accounts, its easy to attribute the missing inventory
>as shrinkage. But what if the user discovers an on-hand quantity
>that is greater than the electronic accounts? For example:
>
>Jan 01, 2001 - Bought 1 Pencil for $3.00
>Jan 03, 2001 - Bought 1 Pencil for $3.50
>Jan 21, 2001 - Bought 1 Pencil for $4.50
>
>Total:
>
>3 Pencils
>$11.00
>
>However, when the cycle count is performed on Jan 31, 2001, 2 more
>pencils are discovered. What do Generally Accepted Accounting
>Principles say regarding the value of the 4th and 5th pencils? If a
>sale of a pencil occurs on Feb 01, 2001, using LIFO, what is the
>COGS?
>
>Oliver?

I think it depends on how you account for the difference. Your
possibilities are:

1. Ignore the discrepancy and lose the surplus (OK with pencils
perhaps, but not with gold bars!)

2. Assume that there has been an error in issuing stock - some other
item may show a deficit of 2; if that seems a likely source of error
do a journal to correct both items.

3. Introduce the extra stock by a transaction; this will either be (a) at
zero cost (which will affect your averages) or (b) at an appropriate cost
such as most recent, which will require a suspense account entry to
balance it.

Realistically, option 1 will cause least administrative cost and is
most likely to be used even for high-value items, unless staff are
exceptionally honest. Option 2 is nice if a suitable deficit can be
identified. Option 3(a) removes the problem at the cost of some
disturbance to averages and option 3(b) transfers the problem to the
suspense account, from which it will effectively be lost at yearend.

If I were auditing such items, I would be interested to see if there
were any pattern to them that might suggest a programming error, or
some other irregularity.

I'm not aware of any official directives on this subject; I think that
the situation does not usually arise (deficits, on the other hand,
are more common...). But I'm not really up-to-date on accountancy
these days.

--
Oliver Elphick Oliver(dot)Elphick(at)lfix(dot)co(dot)uk
Isle of Wight http://www.lfix.co.uk/oliver
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