Question: For most businesses, merchandise inventory is a major portion of the business's assets. Therefore, reporting an accurate amount on the financial statements is important to accurate financial reporting. Whether a member of the business's accounting staff or an outside auditor audits the merchandise inventory of the business, determining an accurate count of the merchandise inventory is very important. Different types of merchandise present different kinds of challenges for the auditor.
a. Actual count, common costs: A sports store has 50 tennis rackets, all the same model. The rackets should be counted and multiplied times the cost per racket to determine the inventory value.
b. Actual count, unique costs: An automobile dealer has 60 new automobiles. Since each automobile probably has a unique and significant cost, the cost of each automobile should be totaled to determine the inventory value.
c. Sampling: A hardware store has many machine bolts. Since the value of each is low and there are many items, a small quantity may be counted or weighed. Then estimate the total cost based on the sample size or weight.
d. Measuring/calculating: An oil company stores crude oil in large tanks. The depth of the oil in the tank can be measured with a measuring rod; then the circumference of the tank can be measured. The total volume of crude oil can be calculated, then divided by the volume of one barrel of crude oil to determine the total barrels. This number can then be multiplied by the cost per barrel of crude oil.