Trouble At The Genius Store (Auditing Inventory)
Author’s Note:
Explaining accounting and finance can be pretty dull. That’s a problem, if you need to learn accounting or finance.
On a plane from St. Louis to Seattle, I decided to try and fix the problem. What if I could wrap some accounting concepts inside of a quirky (funny?) short story? My goal here is to present some information, and then add another step in the story. So, when you get to the end, you’ve been reminded of an accounting concept- but you’ve received the information in a light-hearted way.
Anyway, that’s the goal here. Enjoy!
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The guy who convinces older people to back up their computer data is gonna make a fortune. Greg chuckled to himself as he packed up his Macbook at the Apple Store.
The Genius Bar was always hopping at the Mall. Bored hipsters in Apple T-shirts were all over the place. Essentially, the Genius Bar 20-somethings helping the over-40 crowd with computer issues.
Greg had a minor problem with his MacBook that was fixed. An anxious woman in her 60s was getting help next to him. One comment caught Greg’s attention:
“No, I don’t have my data backed up- is that going to be a problem?”
It was one of those times when you needed to pretend you didn’t hear the comment. Don’t make eye contact, turn and slowly leave the store-, which is just what Greg was doing.
Greg’s firm, MountainView Clothing, manufactured clothing for the hiking and biking market. They sold products through the company website and by distributing through retail outdoor shops.
MountainView had a line of credit balance at the bank. The inventory served as collateral for the loan. The loan agreement required MountainView to get an annual audit opinion on their financial statements.
Jill, the CPA firm’s audit partner, explained that, because inventory was such a big dollar amount of the balance sheet, the inventory balance needed to be counted. She was right- inventory was 25% of MountainView’s total asset balance.
That dollar amount weighted on Greg’s mind, because inventory required a huge cash investment. Cash tied up in inventory could not be used for other purposes, like meeting payroll or buying raw materials for production.
Greg made walked into the office when Rosie, his daughter called.
“Dad, I just got home from school. There’s a Bob Adams for Mayor sign in the yard- do you know Bob Adams? Why is the sign here?”
Greg thought for a minute. “Well, Mary down the street came by and invited me to a luncheon she was hosting for Bob Adams- I guess she thought it was OK….”
“Dad, she’s taking advantage of you- call her and tell her you’re taking it down!”, Rosie yelled.
“Well, she’s really nice- and she’s put yard signs up for another candidates in the neighborhood…”
“Oh, just forget it- you’re such a pushover!” Rosie hung up.
Election season. Greg pulled out his yellow legal pad with his notes from the meeting with the CPAs. The idea was that the physical inventory balance and the inventory detail in the accounting records needed to agree. That meant that MountainView needed to “freeze” all of the incoming and outgoing inventory as of a specific day. No completed goods added to inventory, and no inventory leaving the warehouse to fill an order.
Greg called in Tony, who managed the inventory in the warehouse. “So, let’s do the inventory count on the 1st Saturday of the next month”, said Greg. Now, I’m gonna email production and tell them that any completed goods need to be in inventory by the end of business Thursday. Otherwise, we just leave everything on the production floor- nothing into the warehouse”.
Tony jotted down some notes. “Hey, lemme ask you a question, Greg. Would you sell a house to someone who put up a sign and a phone number on the side of the road?”.
“No- I think that’s a bad idea, Tony. If they can only afford a sign, what makes you think that they have money to buy your house?”
“Yea- good point” Tony said. “Ok- I’ll let everyone know about that Thursday deadline. And no sales shipped after Thursday night, right?”
“Oh- right. I’ll include that in the email, too. Thanks, Tony.”
On Friday, Greg printed the detail inventory listing. It displayed every inventory item’s description, number of items and the cost per item. The pants, shirts and jackets in inventory were packed in boxes of 50 to 100 items.
Jill, the CPA, printed numbered inventory tags. The tags were filled out (description, number of items, cost) as they were placed on each inventory item. Jill brought the listing of tags, and Greg supplied the accounting detail.
On Saturday, 4 CPAs from Jill’s staff worked with 3 MountainView employees to count the detail. Tony and Greg helped manage the count. Fortunately, there were very few differences between the physical inventory and the accounting listing.
Jill proposed some adjustments to the accounting records for some inventory items that were not recorded as sold. She proposed a journal entry to increase cost of sales and decrease inventory. Greg posted the entries, so that the physical count agreed to the accounting records.
The CPAs finished up the audit and provided the audited financials to the bank. Well, that’s a relief, Greg thought. He needed the bank’s line of credit to finance his business operations.
Hopefully, Tony found a real estate agent.
Have used any of these tools? I’d love to hear from you.
Ken Boyd
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies
(email) ken@stltest.net
(website and blog) https://www.accountingaccidentally.com/
(you tube channel) kenboydstl
Image:
Cash register close up
David Tarwin, Cash register close up
(CC BY-SA 2.0)