Question

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. The Allen Company is a wholesale distributor of automotive replacement parts. Initial amounts taken from Allen's accounting records are as follows:

Inventory at December 31, Year 5 (based on

physical count of goods in Allen's warehouse on December 21, Year 5) $1,250,000

Sales in Year 5 $9,000,000

Accounts payable at December 31, Year 5:

Vendor Terms Amount Baker Company 2/10, Net 30 $265,000

Charlie Company Net 30 210,000

Dolly Company Net 30 300,000

Eager Company Net 30 225,000

Full Company Net 30 --

Greg Company Net 30 --

$1,000,000

Complete Allen's inventory cutoff using the information above. Enter the amounts of any adjustments needed for the effects of the following transactions on Allen's inventory, accounts payable, and sales in the designated cells below. Enter all amounts as positive values. If no entry is necessary, enter a zero (0) or leave the cell blank

. Transactions Inventory Accounts Payable Sales Initial Amount $1,250,000 $1,000,000 $9,000,000

1-3. Retailers were holding $210,000 at cost ($250,000 at retail) of goods on consignment from Allen, the consignor, at their stores on December 31, Year 5.

4-6. Goods were in transit from Greg to Allen on December 31, Year 5. The cost of the goods was $25,000, and they were shipped FOB shipping point on December 29, Year 5.

7-9. A quarterly freight bill in the amount of $2,000 specifically relating to merchandise purchases in December Year 5, all of which was still in the inventory at December 31, Year 5, was received on January 3, Year 6. The freight bill was not included in either the inventory or in the accounts payable at December 31, Year 5.

Answer 1

The physical inventory counting process is highly dependent on a stationary inventory. This means that there can be no movement of inventory into or out of the warehouse area during the counting process, nor can there be a movement of any related paperwork. If this basic rule is not followed, you will have great difficulty in determining the true value of the ending inventory, because the quantities were in flux during the count. This section contains sample procedures that are applicable in most situations for ensuring a proper period-end cutoff of all inventory-related transfers. The procedures cover receiving, central stores, and the finished goods storage area. They are:

Receiving and receiving inspection

• No paperwork or parts will be forwarded to the central stores area later than 11:00 A.M., October 26. This will allow paperwork to be processed and stock put away.
• Beginning October 15, all receivers processed by receiving inspections must be stamped “Before Inventory.”

Central stores

• Receipts. All paperwork on parts received from receiving inspection must be transferred to data processing before 4:30 P.M. Friday, October 26.
• Issues. The paperwork on all issues to open orders and jobs in process must be completed and sent to data processing before 4:30 P.M., Friday, October 26. On issues for sales orders, the issue documents and parts must be in the staging area or shipping area before 3:30 P.M., Friday, October 26.

Finished goods area

• Staging area. If parts are not shipped before 3:30 P.M., Friday, October 26, they will be retained as part of the storeroom inventory.
• Receipts. Receipts into the finished goods area must be received and the paperwork sent to data processing before 4:30 P.M., Friday, October 26. The warehouse manager must ensure that all finished units are properly stored and that all related paperwork is sent to data processing before the 11:00 A.M. cutoff.
• Issues. On issues for sales orders, the issue card and parts must be in the staging or shipping areas before 11:00 A.M., Friday, October 26. For issues to orders and job numbers, all paperwork on issues to work-in-process must be in data processing before 4:30 P.M., Friday, October 26.

The preceding procedures are intended for those companies using traditional paper-based transactions that are centrally recorded into the inventory database. If a more advanced system is in place where the materials management staff enters transactions directly into the inventory database either through local terminals in smaller batches or individually with radio frequency scanners, you can enter transactions until just a few moments before the beginning of the physical inventory count. Thus, advanced data entry systems allow a company to minimize the time period during which inventory cannot be moved during a physical inventory count.