22.4 Inventory for Resale

Policy Statement

Units must ensure that merchandise held for resale purposes as a part of a self-supporting operation (also known as “inventory for resale”) is properly managed in accordance with generally accepted accounting principles, internal controls, and good business practices.

Reason for the Policy

To safeguard University of Illinois System assets and to ensure accurate reporting for the system’s audited financial statements.

Applicability of the Policy

Any unit who has inventory for resale on hand that is sold to either internal or external customers as part of an ongoing business operation.

Procedure

To ensure that inventory for resale is properly managed and accounted for in Banner, refer to the guidelines and procedural steps below.

1. Understand the definition of inventory for resale.
   1. Inventory for resale is defined as any type of products, goods, merchandise, or other tangible items that are held for resale purposes to internal or external customers (i.e., to customers within other system units or external to the system) as part of an ongoing business operation.
   2. Inventory for resale can either be produced/manufactured by the seller, or simply purchased for resale purposes from a vendor. Thus, inventory for resale could include items that are works-in-progress still in production (such as raw materials used to produce the inventory that will eventually be sold) or finished goods that are immediately ready for sale.
   3. From an accounting perspective, inventory for resale is a current asset recorded on the general ledger. The value of the inventory for resale on hand as of June 30 must be properly recorded to Banner at the lower of cost or fair market value to ensure compliance with generally accepted accounting standards and good business practice.
   4. Inventory for resale only includes items specifically held for resale purposes to customers. Tangible items utilized as a part of a unit’s daily business operations (such as consumable supplies or moveable equipment) do not qualify as inventory for resale.
      1. For example, rubber gloves used by a veterinary clinic during a routine examination or surgery on a customer’s pet would be considered as consumable supplies, and not as inventory for resale.
   5. Common examples of inventory for resale include: merchandise held for resale (such as apparel or memorabilia); publications held for resale (such as books, journals, or pamphlets); raw materials used in creating a good held for resale (such as lumber used to build furniture that will be sold to customers); and goods sold to customers in conjunction with the sale of a service (such as food sold to customers as a part of a catering service).
2. Identify any ongoing business operation within a unit that sells products, goods, merchandise, or other tangible items to ensure proper management of the inventory for resale in all these operations in accordance with these policies and procedures.
   1. This includes the analysis of sales activities taking place in a variety of areas, such as self-supporting, service plan, custodial, or fundraising operations within gift funds. While most of these activities would fall within self-supporting operations, there may be other areas to consider as well.
3. For any business operations that do hold inventory for resale, ensure that adequate processes are in place to properly manage and safeguard that inventory for resale throughout the fiscal year. This includes good business practices including, but not limited to:
   1. Ensuring that a secure and cost-effective physical location is identified to store the inventory for resale, which also allows for easy retrieval of the inventory items when they are sold.
      1. If possible, units should consider creating proper separation between the storage space used for inventory for resale and the storage space used for other non-inventory items, such as consumable supplies used in unit operations and any potential inventory items being held on consignment for an external party (which is not considered as inventory for resale for the system’s financial statements).
      2. By creating proper separation between these items in the storage space, it helps ensure there is no confusion during the annual physical count and helps ensure consumable supplies and/or inventory held on consignment are not mistaken for inventory for resale (which would inappropriately inflate the inventory for resale count numbers and values).
   2. Monitoring the levels of inventory for resale on hand to ensure that levels are maintained at an appropriate level to meet customer demand, while not holding an excess amount. If excess levels of inventory are held, this may lead to increased and unnecessary storage costs, as well as potential waste (for example, if the excess inventory eventually becomes obsolete).
   3. Purchasing (or producing) more inventory for resale items when inventory levels need replenished, to ensure the ability to consistently meet customer demand on a timely basis.
   4. Considering the shelf life of products as well as the potential benefits of buying in bulk to take advantage of quantity discounts when available and balancing those concepts with customer demand.
   5. Regularly analyzing the sales history of the different inventory for resale items to help determine which products still have a strong demand, as opposed to others that may not. This may help the decision-making process when analyzing future sales efforts.
4. When purchasing (or producing) inventory for resale items, ensure that the cost of the purchase (or production) is coded to the proper expense account code for financial reporting purposes.
   1. If a unit is purchasing inventory for resale items from an internal or external vendor (as opposed to producing the item themselves), then the cost of that purchase should typically be recorded to expense account code 187100, Purchase of Goods for Resale.
      1. There may be times when an even more specific expense account code which rolls up to account code 187100 could be used, but in most cases, the 187100 expense account code will properly classify the transaction for financial reporting purposes.
   2. If a unit is purchasing items that will be sold in conjunction with an overall service that is being sold to the customer, then the cost of those items typically should be recorded to expense account code 187100, Purchase of Goods for Resale as well.
      1. For example, if a unit sells catering services, then the cost of the food purchased for the catered event should be coded to the 187100 expense account code to ensure the expense is properly classified for financial reporting purposes.
   3. If a unit is producing the inventory for resale items themselves (as opposed to purchasing the inventory from an internal or external vendor), then the cost of the raw materials used to produce the item should typically be recorded to expense account code 187100, Purchase of Goods for Resale as well.
      1. For example, if a unit produced furniture it sold to other system units, then the cost of the lumber, fabric, and any other materials used in the production of the furniture should be coded to the 187100 expense account code to ensure the expense is properly classified for financial reporting purposes.
      2. In these scenarios, when there are multiple purchases of different items that are all used in the production of the inventory for resale, it is important to properly track the cost of these various purchases. By doing this, the unit will be able to better determine the cost of the item produced, which is essential when determining the valuation of the item (at the lower of cost or market) for financial reporting purposes.
   4. Finally, if a unit is producing the inventory for resale items themselves (as opposed to purchasing the inventory from an internal or external vendor), then there may be times where they must pay a vendor for services provided (as opposed to goods) as a part of the inventory production process. In those cases, the appropriate services expense account code would need to be used to record the services expense. This will help ensure proper tax reporting to the external vendor, if applicable.
      1. For example, if a unit is producing some sort of publication to sell to its customers, they may need to pay a vendor for printing services to produce the publication that will eventually be sold. In those cases, the cost of the printing services should be coded to the appropriate printing services expense account code (as opposed to 187100). Coding this expense to the proper account code helps ensure that the services expense is identified for proper tax reporting (such as the issuance of IRS Form 1099-MISC).
5. Perform an annual physical count of inventory for resale on hand as of the close of business on June 30 (the final day of the fiscal year). See below for additional details and recommended controls to implement during this annual physical count process:
   1. The annual physical count should be conducted as of the close of business on June 30, or as close as possible to this date. If this is not possible, then it is required to properly track any purchases and/or sales made between the date of the physical count and the close of business on June 30. Any additions to and/or subtractions from the annual physical count totals must be tracked and reconciled to the closing balance as of June 30 for audit trail purposes.
      1. For example, if a unit was not able to perform the required physical count on June 30 and instead had to perform the physical count on June 27, then that unit must track and reconcile any changes to those physical count totals that may have occurred between the date of the physical count (June 27) and the close of business of June 30.
   2. Ensure that enough time is scheduled to perform the physical count, as the time needed to perform the physical count will vary depending on the volume of inventory for resale on hand as well as the efficiency of the inventory storage methods used. For example, some physical counts may take only an afternoon, while others may span several days.
   3. If possible, the area where the physical count is to be conducted should be closed during the time of the physical count, and the sale or receipt of inventory items should not occur during the physical count. This will help prevent the risk of inventory totals changing after the physical count was performed, which would cause a discrepancy between the count totals and the actual items on hand as of June 30.
      1. For example, if the physical count is being performed during the middle of a business day and if the inventory storage area is not closed, this creates the risk of an inventory item being sold shortly after it was counted, which would nullify the accuracy of the count total. This is why it is best to close the inventory storage area during the physical count, or simply to wait until the close of business on June 30 to perform the count.
   4. To ensure proper controls and safeguarding of the inventory for resale items being counted, ensure that an adequate number of qualified staff (i.e., at least two or more) are assigned to perform the physical count together at the same time.
      1. By requiring that two or more staff are present at the physical count reduces the risk of theft.
   5. If a unit uses a perpetual inventory system (a computerized system that continually tracks the quantity of inventory for resale on hand), then the staff involved in receiving and maintaining the inventory for resale records within the perpetual system should not be involved in the physical count, to ensure proper segregation of duties.
   6. To help ensure the qualified staff have what they need to perform an accurate and efficient physical count, consider providing written instructions on how to perform the count as well as any other supplies needed, such as count sheets, the inventory storage area floor plans, inventory tags, and any other supplies or applicable information.
   7. Ensure that count sheets are used during the physical count, and that they list all the inventory items to be counted. The count sheets should provide space for the staff to notate the number (e.g., 12) or unit (e.g., one case) of inventory items counted, along with space for text describing the inventory item (e.g., apparel), and the location where it is stored (e.g., room 23, aisle 7, shelf 2).
   8. Also, if a unit uses a perpetual inventory system, the count sheets should not include any notations of quantities on hand from the perpetual inventory record. Staff must independently determine that from their physical count.
   9. Instruct the staff performing the physical count to move through the inventory storage area in a systematic manner, to ensure the entire inventory storage space is examined, and nothing is missed.
   10. Instruct the staff performing the physical count not to include any inventory for resale held on consignment from an external party in their physical count totals, as that is not inventory for resale owned by the system and should not be included in inventory for resale totals for financial reporting purposes.
   11. Instruct the staff performing the physical count not to include any consumable supplies the unit may utilize for day-to-day business operations in their physical count totals. In addition, any marketing materials or promotional items distributed at no charge should not be included in the inventory count totals (as these items are not held for resale purposes). Given that these types of items may be stored in a similar storage area as the inventory for resale items, it is important that the staff performing the physical count understand the difference between these items and the inventory for resale items to ensure count totals are not inflated by non-inventory items.
   12. Instruct the staff performing the physical count not to include any inventory for resale items that are either: (1) in the receiving process and not yet included in the perpetual inventory stock, or (2) in the shipping process and already removed from perpetual inventory stock. These types of items should be tracked separately so they can be considered for addition or subtraction when the formal count of items on hand has been completed.
   13. Instruct the staff to make notations on the count sheet if any inventory items appear to be obsolete, or if the items appear to have been stored for a long time, as this could be a sign of obsolete inventory that may no longer have a strong market value and that may need written off.
   14. To help mitigate the risk of double-counting or missing items during the physical count, units should consider applying inventory tags to items once they have been officially counted. This helps provide a clean audit trail showing which items have been counted and which items have not. This is especially helpful if the physical count is not performed all in one sitting and if the volume of items to count is large.
       1. For example, if a two-person team is performing the count together, one staff member can call out the item being counted while applying the inventory tag to the item, while the other staff member records the counted item on the count sheet. Then, once the physical count is complete, a final review can be made to see if any items were not tagged, which could be a sign of an item that was potentially missed.
6. After the physical count is complete, if a perpetual inventory system is used, then an individual (excluding the count staff and excluding the staff who maintain the records within the perpetual inventory system) should compare the physical inventory count to the perpetual inventory records to reconcile any discrepancies and verify the count totals. If discrepancies exist, units must identify the actual correct total (such as performing the count again, reviewing the perpetual inventory record to ensure that no items were in transit, etc.). Once the final count total has been confirmed, this should be recorded on the appropriate count sheets for proper audit trail documentation.
7. Once the physical count has been finalized, units must calculate the total value of the inventory for resale on hand as of the close of business on June 30, using the lower of cost or market method.
   1. This calculation is completed by comparing the historical cost of the inventory on hand as of June 30 to the current fair market value of the inventory on hand as of June 30 to see which is lower.
      1. For example, if a unit had 100 inventory items on hand as of the close of business on June 30, and if each item had a historical cost of $30 per item and a current fair market value of $50 per item, then the value of the inventory for resale should be recorded at the lower of the two (i.e., the $30 historical cost), for a total of $3,000.
   2. When determining the historical cost, it is important to use a consistent inventory valuation method from year-to-year. See below for acceptable methods to consider:
      1. The first-in, first-out (FIFO) method is a valuation method whereby the first inventory items purchased (or produced) are the first items to be shipped out when a sale is made.
         1. For example, consider a unit who purchases 40 inventory items at a cost of $5 per unit and then subsequently purchases an additional 60 inventory items at a cost of $6 per unit. If that unit sells 30 inventory items the following week, then their remaining inventory on hand would be valued at $410 using the FIFO method (10 remaining inventory items at a $5 historical cost + 60 remaining inventory items at a $6 historical cost = $410 historical cost for the remaining inventory).
      2. The last-in, first-out (LIFO) method is a valuation method whereby the last inventory items purchased (or produced) are the first items to be shipped out when a sale is made.
         1. For example, consider a unit who purchases 40 inventory items at a cost of $5 per unit and then subsequently purchases an additional 60 inventory items at a cost of $6 per unit. If that unit sells 30 inventory items the following week, then their remaining inventory on hand would be valued at $380 using the LIFO method (40 remaining inventory items at a $5 historical cost + 30 remaining inventory items at a $6 historical cost = $380 historical cost for the remaining inventory).
      3. The average cost method is a valuation method whereby units assign a cost to inventory items based on the total cost of goods purchased (or produced) in a period, divided by the total number of items purchased (or produced).
         1. For example, consider a unit who purchases 40 inventory items at a cost of $5 per unit and then subsequently purchases an additional 60 inventory items at a cost of $6 per unit. This would result in an average cost of $5.60 per item ($560 total cost divided by 100 items). If that unit sells 30 inventory items the following week, then their remaining inventory on hand would be valued at $392 using the average cost method (70 remaining inventory items at an average cost of $5.60 per item = $392 historical cost for the remaining inventory).
8. Ensure that the value of the inventory for resale on hand from the physical count as of June 30 is properly recorded to Banner at the lower of cost or market.
   1. Most units report the value of their inventory for resale on hand to University Accounting and Financial Reporting (UAFR) as a part of the Year-End Fact Sheet process. By reporting the applicable amounts and values on the Year-End Fact Sheet, the unit is assured that UAFR will properly update the inventory for resale balance within the general ledger of the applicable fund for year-end reporting purposes, to ensure the updated and accurate value is recorded for year-end close.
      1. In cases where the inventory for resale has become obsolete since the prior fiscal year and has no remaining market value (i.e., the value is at $0), UAFR still needs units to report those scenarios accordingly on the Year-End Fact Sheet. By explaining that the value of the inventory is now at $0, UAFR will then be able to complete an entry in Banner prior to year-end close to properly devalue the inventory for resale to $0 within the general ledger. This helps ensure assets are not overstated on the general ledger.
      2. Also, in the rare case where the value of the inventory for resale value has not changed since the prior fiscal year (e.g., if the store where the sales typically take place was temporarily closed for renovations, leading to a pause in sales for the year), then UAFR asks that an explanation is provided along with the information that is supplied on the Year-End Fact Sheet, explaining this unique situation (as it may initially appear odd to report the same exact inventory for resale value for two years in a row).
   2. Some units prefer to maintain their own inventory for resale balances throughout the year, using their own journal voucher entries. This is an allowable option as well, assuming the parameters and guidelines outlined in this policy are followed. Contact UAFR for guidance on how to complete the necessary accounting entries, if needed.