MERCHANDISE INVENTORY > DETERMINING ACTUAL QUANTITIES IN THE INVENTORY

The first stage in the process of "taking" an inventory is the determination of the quantity of each type of merchandise owned by the enterprise. Where the periodic system is used, the counting, weighing, and measuring should be done at the end of the accounting period. In order to accomplish this, the inventory crew may work during the night, or business operations may be suspended until the count is completed.

The details of the specific procedures for determining quantities and assembling the data vary considerably among companies. A common practice is to employ teams composed of two persons; one person counts, weighs, or otherwise determines quantity, and the other lists the description and the quantity on inventory sheets. The quantity indicated for high cost items is verified by a third person at some time during the inventory-taking period. It is also advisable for the third person to verify other items selected at random from the inventory sheets.

All of the merchandise owned by the business on the inventory date, and only such merchandise, should be included in the inventory. It may be necessary to examine sales and purchase invoices of the last few days of the accounting period and the first few days of the ensuing period to determine who has legal title to merchandise in transit on the inventory date. When goods are purchased or sold FOB shipping point, title ordinarily passes to the buyer when the goods are shipped. When the terms are FOB destination, title usually does not pass to the buyer until the commodities are delivered. To illustrate, assume that merchandise purchased FOB shipping point is shipped by the seller on the last day of the buyer's fiscal period. The merchandise does not arrive until the following period and hence is not available for "counting" by the inventory crew. Such merchandise should nevertheless be included in the buyer's inventory because title has passed. It is also evident that a debit to Purchases and credit to Accounts Payable should be recorded by the buyer as of the end of the period, rather than recording it as a transaction of the following period.

Another example, although less common, will further emphasize the importance of scrutinizing transactions involving shipments of merchandise. Manufacturers sometimes ship merchandise on a consignment basis to retailers who act as the manufacturer's agent when selling the merchandise. The manufacturer retains title until the commodities are sold. Obviously, such unsold merchandise is a part of the manufacturer's (consignor's) inventory even though he does not have physical possession. It is just as obvious that the retailer (consignee) should not list the consigned merchandise on his inventory sheets.