INVENTORY
MANAGEMENT
From a Decision Making Standpoint
Mallory Johnson, Stacy Bohne
Topics That Will be Covered
2


Inventory Concerns
Inventory Turnover
Analysis & Optimization
 Performance Indicators


Inventory Valuation Methods
Handout / Case Study
 Future Changes with Accounting Methods




Physical Controls for Inventory
Counting Procedures in conducting a Physical Inventory
count
Inventory Fraud Schemes
Inventory Concerns
3


Physical Cost of Inventory
Inventory Turnover
 Analysis
& Optimization
 Performance Indicators
 Slow-Moving
Items
 Customer Service Level
 Shrinkage and E&O
 Cash Flow Measures
 US GAAP & Tax Treatment
Inventory Valuation Methods



Specific Costs
FIFO (First in First Out)
LIFO (Last in First Out)
MINI CASE

Handout:
You are currently a member of senior management
(CEO,CFO and Controller) of a public company. As a
team you have narrowed your choices and must decide
between two valuation methods, FIFO and LIFO. After
considering the income and tax implications which
method would you choose?
Last In First Out-LIFO


Purpose- To state as closely as possible the cost of
goods sold at the current market cost
Historical advantages
 Reports
costs closer to market value
 Reduces federal income taxes (during times of rising
prices)

Historical disadvantages
 Record
keeping is more extensive
 Old inventory could distort taxable income if inventory
levels drop to zero.
FIFO vs. LIFO-Mini Case
FIFO
Cost of Goods Sold:
$14,290
Net Income:
$5,710
Sales
Revenue:
20,000
LIFO
Cost of Goods Sold:
$14,570
Net Income:
$5,430
Which method did you choose?
NEW! Issues with LIFO

What if U.S GAAP conforms to IFRS standards?
LIFO is DISALLOWED under
IFRS!
NEW! Issues with LIFO
Currently:
If a company uses LIFO for Tax purposes they MUST use it
for Financial Reporting purposes.
Possibly with conformity with IFRS:
It would not be wise or cost effective to use LIFO since it is
disallowed for financial reporting and would put
companies in violation of the conformity rule with the
IRS.
NEW! Issues with LIFO
So let’s say that you chose LIFO in 2009 in our
example case…
In 2015, U.S GAAP is eliminated and IFRS is
adopted….
NOW WHAT?
Are you happy with the decision you made in 2009?
Other Inventory Valuation Methods
11




Specific Costs
FIFO (First in First Out)
LIFO (Last in First Out)
Average Calculations




Lower of Cost or Market



Weighted Average
Monthly Average
Standard Costing
Market value = current replacement cost
Inventory Valued Above Cost?
US GAAP Reporting & Tax

Consistency
Physical Inventory Controls
12

Ongoing physical inventory controls:
1)
2)
3)

Ensure W/H manager is accountable.
Controlled access to inventory stocking locations, the
facility, and shipping areas.
Record all transactions for items that enter or leave
the W/H, and require signatures from all shipping
and received personnel that handle movement of
inventory
Controller Responsibility
Physical Inventory Counts
13

Before Counting Begins:
1)
2)
3)
4)
5)
6)
7)
8)
Use trained personnel
Utilize “dead time”
Clean-up in advance
Train personnel
Define and execute cutoff procedures
Assign the staff to roles
Define a leader
Create an inventory-tag form or count sheet
Physical Inventory Counts
14

Actual Counting Procedures:
1)
2)
3)
4)
5)
6)
7)
8)

Notify the auditors
Assign counting teams to areas
Count all areas
Reviewed counted areas
Control distribution of tags
Summarize results from inventory counts
Verify discrepancies
Review cutoff procedures and accounting entry
Controller Responsibility
Inventory Fraud - Common Types

Theft of inventory or scrap
 MOST



COMMON
Scrapping and selling good inventory
Sales return schemes
Concealment of other frauds through inventory
accounts
References (APA)
16





Schreibfeder, J. (1997). Why is Inventory turnover important?. Retrieved
from http://www.effectiveinventory.com/article2.html
(2009). Inventory turnover. Businessdictionary.com. Retrieved (2009,
October 20) from http://www.businessdictionary.com/definition/inventoryturnover.html
Schreibfeder, J. (2007). Problems with turnover. Retrieved from
http://www.effectiveinventory.com/article65.html
Pender, K. (2001, May). Write-offs remove excess inventory from books-not
shelves. SFGate, Retrieved from http://www.sfgate.com/cgibin/article.cgi?file=/chronicle/archive/2001/05/08/BU54900.DTL&type
=business
(2009). How does inventory affect taxes?. Answers.com. Retrieved (2009,
October 20) from
http://wiki.answers.com/Q/How_does_inventory_affect_taxes
References (APA)
17





(2009). Lower of cost and market method. Investopedia. Retrieved (2009,
October 20) from
http://www.investopedia.com/terms/l/lowerofcostandmarketmethod.asp
Hagen, K. (2005, September). How to account for inventory for income tax
purposes. Googobits.com, Retrieved from
http://www.googobits.com/articles/p0-2400-how-to-account-forinventory-for-income-tax-purposes.html
(2009). U.S. GAAP. CPAclass.com. Retrieved (2009, October 22) from
http://cpaclass.com/gaap/sfas/gaap-sfas-151.htm
Roehl-Anderson, Janice, & Bragg, Stephen. (2005). The Controller's function.
Hoboken, NJ: John Wiley & Sons, Inc.
Bloom, R, & Cenker, W. (2009). The Death of LIFO?. Journal of Accountancy,
Retrieved from
http://www.journalofaccountancy.com/Issues/2009/Jan/DeathOfLIFO.htm
References (APA)
18

(2009). Common Inventory Fraud Schemes, Symptoms, and Detection
Methods. AICPA. Retrieved (2009, October 26) from
http://fvs.aicpa.org/Resources/Antifraud+Forensic+Accounting/CPAs+and
+Others+Performing+Fraud+Consulting+Services/Programs+and+Controls
/Analyzing+Internal+Controls+for+Fraud+Opportunities/Exhibit+54+Common+Inventory+Fraud+Schemes+Symptoms+and+Detection+Meth
ods.htm
Questions?
19