The California State University
GAAP Reporting Manual
Effective June 2011
SECTION 4-6
PREPAID EXPENSES AND INVENTORIES
OBJECTIVE OF GAAP ADJUSTMENTS
The objectives of the GAAP adjustments that may be necessary at June 30 related to prepaid
expenses and inventories are:
•
To identify and record expenses for goods or services relating to future periods with future
economic benefits as prepaid expenses on the statement of net assets at June 30.
•
To identify and record expenses relating to inventory-type items not used at June 30 as
inventory on the statement of net assets.
PREPAID EXPENSES
Prepaid expenses are goods or services paid for and recorded in advance of their use or
consumption in the course of business, which represent expenses of a future period and,
therefore, should properly be reported as an asset at June 30.
Typical types of prepaid expenses in most business entities include insurance, rent, and multiperiod service contracts. CSU campuses should analyze expenses, and consider the following
items as potential prepaid expenses and other assets - current:
•
Library subscriptions or periodicals
•
Multi-year equipment service contracts
•
Significant amounts of postage purchases, especially near year-end
•
Any types of advance paid to a third party or employees
At year-end, an analysis should be performed and entries should be made to record prepaid
expenses as assets on the statement of net assets.
EXAMPLE – At the end of the current year, the campus determined that prepaid expenses for
the CSU Operating fund totaled $1,200,000. At the end of the prior year, the campus recorded an
adjustment for prepaid CSU Operating fund expenses in its GAAP basis financial statements in
an amount totaling $1,000,000.
Last revised April 18, 2011
4.6-1
The California State University
GAAP Reporting Manual
Effective June 2011
Reverse Prior Year Balance
Unrestricted
Debit Expenses (various) by functional and natural classifications
Credit Prepaid expenses and other assets (beginning)
$1,000,000
$1,000,000
(To properly record operating expenses incurred in the current year and reverse the prior year
prepaid expenses balance)
Current Year Balance
Unrestricted
Debit Prepaid expenses and other assets
$1,200,000
Credit Expenses (various) by functional and natural classifications
$1,200,000
(To properly record prepaid expenses for those expenses prepaid as of year-end but not yet
used/incurred)
INVENTORIES
Similar to prepaid expenses, inventories on the statement of net assets represent items purchased
but not yet used in the course of business by year-end. These inventory items represent an
expense of a future period and, therefore, should properly be reported as an asset at June 30.
For legal-basis accounting, campuses generally expense all inventoriable items. For GAAP
financial reporting purposes, a determination of the amount of inventoriable goods on hand at
June 30 will need to be made by each campus. In order to make this determination, campuses
will need to identify potentially significant inventories. Also, each campus must determine if the
aggregate cost of its inventory at June 30 is material. Note that the $5,000 capitalization
threshold for capital assets would not apply to individual items of inventory. Rather, the cost of
all inventory items in the aggregate should be used in assessing materiality. The following are
some common locations on campus where inventory may be located:
•
Plant operations (various maintenance items)
•
Campus bookstores
•
State stores (campus office supplies)
•
Health center and pharmacy (medicines and supplies)
•
Print shop and computer center (quantities of paper and printing supplies)
•
Campus newspaper or radio station offices
Last revised April 18, 2011
4.6-2
The California State University
GAAP Reporting Manual
Effective June 2011
There are two commonly used systems of inventory maintenance for purposes of determining the
appropriate level of inventory which are described as follows:
Periodic: Inventory is determined by a physical count as of a specific date. The inventory shown
on the statement of net assets is determined by a physical count as of the statement of net assets
date.
Perpetual: Inventory is determined based on inventory records that are maintained and updated
on a regular basis. This system has the advantage of providing inventory information on a timely
basis but requires the maintenance of a full set of inventory records. GAAP requires that a
physical count of inventory be made periodically in order to verify the perpetual inventory
records.
Campuses may use either method to account for their inventory. However, records should be
maintained as supporting source documentation of the cost of the inventory at June 30. If it is
determined by the campus that the aggregate cost of the inventory is not material, no additional
work or journal entries will be necessary. If the cost is material, the campus will need to record
entries to recognize existing inventories at June 30 as assets on the statement of net assets. If a
date other than June 30 is used to determine the value of inventory (i.e. May 31) the campus
should analyze their June purchases and uses to determine if an adjustment to their May 31
calculation is required.
EXAMPLE – At the end of the current year, the campus determined that inventory purchased
from CSU Operating fund sources totaled $2,000,000. At the end of the prior year, the campus
recorded an adjustment for CSU Operating Fund inventory in its GAAP basis financial
statements in an amount totaling $1,800,000.
Reverse Prior Year Balance
Unrestricted
Debit Expenses (various) by functional and natural classifications
Credit Prepaid expenses and other assets (beginning)
$1,800,000
$1,800,000
(To properly record inventory expense in the current year and reverse the prior year inventory
balance)
Current Year Balance
Unrestricted
Debit Prepaid expenses and other assets
$2,000,000
Credit Expenses (various) by functional and natural classifications
(To properly record inventory balance on a GAAP basis)
Last revised April 18, 2011
4.6-3
$2,000,000