In accordance with the second fundamental rule, any goods of others held for sale on a commission basis must be carefully excluded from the count, as should also goods received before the close of the period but with invoices dated some time in the future. Furthermore, all goods inventoried from their invoices, i.e., all goods not taken into stock, must be earmarked so as not to be charged into the next period’s purchases. This is best accomplished by stamping the invoices as “Included in the 19.... Inventory.”
Inventory Methods. The careful organization of the physical stock to be inventoried, sorting any misplaced items, and separating them into classes, and an equally careful organization of the clerical force, acting under explicit directions based on a well-thought-out plan, are fundamentally essential to accuracy and to the prevention of any duplication of count. In some cases the use of duplicate or coupon tags proves very valuable. On these tags provision is made for recording in duplicate the number of units and condition as to salability, and they are ruled with two money columns. The tags are numbered on both parts consecutively and are charged out to the various departments, as many being issued as there are classes or compartments of goods. As the count is made of a certain class of goods, a tag is attached to the compartment or other storage place as evidence that the count has been made, after which the lower portion is torn off and sent to the office. Any missing numbers indicate omissions in the count. If the card has been lost, the duplicate still attached to its compartment will indicate the count. After all cards are accounted for, the duplicates are detached and the goods covered by them are then released for sale or other use. In taking the inventory it is especially important that where goods are below normal as to salability, their estimated per cent of normal condition be noted on the tag. This gives a basis for valuing and should show the amount of deterioration and its cause.
Perpetual Inventory
The use of a perpetual inventory system is quite general in some lines. Its operation requires almost as careful a record of stock as is made of cash, i.e., not only must all receipts be recorded but all disbursements as well. In a trading concern this record usually takes the form of a stock book of some sort, to which entry is made, as to quantities only, from the purchase and sales invoices, the balance shown at any time being the stock remaining on hand. The application of the unit value gives the value of the entire stock and so makes possible monthly statements of approximate condition. In a factory, a separate stores ledger may be operated, carrying an account with every kind of material used. This ledger is controlled by the Raw Material or Stores account on the general ledger. Entry to the stores ledger accounts is made from the purchase invoices for receipts, and from formal requisitions drawn on the stores-keeper for disbursements, i.e., for the issuance of material. The stores ledger may record not only quantities but also values, so that its balance should be the value of the stores on hand. This is possible because the material is drawn out at cost price.
Oftentimes, for retail concerns, instead of the stock book method, the percentage method of book inventories described in Volume I, page 506, gives more satisfactory results when sufficient past experience can be drawn from.
Necessity of Physical Count. It must not be assumed that a perpetual inventory system obviates the necessity of taking a physical inventory, for it does not. All that it accomplishes is to secure a closer supervision over stock between inventory times and to make possible the showing of approximate results at interim periods. Where operated, it is possible to take the physical inventory piecemeal, although there is a marked advantage in taking a complete inventory periodically. The piecemeal method means that any department can do its stock-taking during a slack time without regard to the time when other departments take theirs. Thus there is less interference with the regular conduct of business. It must be borne in mind, however, that the physical inventory is just as essential as ever because of the many inaccuracies that tend to creep into the perpetual inventory system, and furthermore because of loss, theft, over-measure, and so on, which throw the book record out of agreement with the actual count.
CHAPTER XIV
TEMPORARY INVESTMENTS; ACCRUED
AND DEFERRED ITEMS
Temporary Investments
Nature of Temporary Investments
The next item to be considered for valuation in the current assets section of the balance sheet is temporary investments. These are assets, such as stocks and bonds of ready marketability, in which current funds are tied up temporarily. Investments in stocks and bonds for purposes of securing business connections and privileges essential to the most efficient conduct of the business do not belong to this category. The term usually covers only those assets representing the investment of temporarily surplus cash or those acquired in settlement with debtors with the expectation of early realization. As A. L. Dickinson[44] so well says, “such investments have no relation whatever to the business and can be disposed of without in any way interfering with its earning capacity, other than the loss of the dividends thereon.”