oversight

Inventory System Checklist: Systems Reviewed Under the Federal Financial Management Improvement Act of 1996 (Exposure Draft)

Published by the Government Accountability Office on 1997-12-01.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                     United States General Accounting Office

GAO                  Financial Management Series




May 1998
                     Inventory System
                     Checklist
                     Systems Reviewed
                     Under the Federal
                     Financial Management
                     Improvement Act of
                     1996




GAO/AIMD-98-21.2.4
PREFACE


B-278190

The Federal Financial Management Improvement Act (FFMIA) of 1996 requires, among
other things, that agencies implement and maintain management systems that
substantially comply with federal financial management systems requirements. These
requirements are detailed in the Financial Management Systems Requirements series
issued by the Joint Financial Management Improvement Program (JFMIP) and in Office of
Management and Budget (OMB) guidance (Circular A-127 and September 9, 1997
implementation guidance).

To assist in reviews of financial management systems under the requirements of FFMIA,
we are issuing three checklists concurrently as practice aids. Two of the checklists
reflect the system requirements defined by JFMIP, while the third checklist is based on
the JFMIP framework document. The third checklist describes a single, integrated
financial management system and, as set forth in the JFMIP framework document, is
primarily a reference source rather than a standard-setting document.

This checklist reflects JFMIP's Inventory System Requirements. The purpose of this
guide is to provide a checklist to assist (1) agencies in implementing and monitoring their
inventory system and (2) management and auditors in reviewing the systems to determine
if the inventory system is in substantial compliance with FFMIA. This checklist is not
required to be used in assessing the inventory system. It is provided as a practice aid
available for use as a tool by experienced staff. This checklist, the JFMIP source
document, and the two previously mentioned OMB documents (Circular A-127 and the
September 9, 1997, implementation guidance) should be used concurrently.

Experienced judgment must be applied in the interpretation and application of this guide
to enable the user to consider the impact of the completed checklist on the entire
inventory system and whether that system as a whole substantially complies with system
requirements.

As technology progresses, new applications emerge replacing older, less efficient and less
effective ones. Policies and procedures in effect under older technologies give way to
new and different processes. Judgment must be used when assessing an agency's
inventory system against JFMIP systems requirements in order to recognize when new
and different technologies, although not specified in the guidance, achieve the objectives
of JFMIP systems requirements.




                                            GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
The JFMIP systems requirements series supersedes the standards previously issued in
appendix III, "Systems Standards," Title 2, "Accounting," of the GAO Policy and
Procedures Manual for Guidance of Federal Agencies.

Additional copies of this checklist can be obtained from Room 1100, 700 4th St. NW, U.S.
General Accounting Office, Washington, D.C. 20548, or by calling (202) 512-6000, or TDD
(202) 512-2537. It is also available on the Internet on GAO's Home Page (www.gao.gov)
under "Special Publications."




Gene L. Dodaro
Assistant Comptroller General
Accounting and Information Management Division




Page 2                                     GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
CONTENTS


Preface                                                                                      1

Overview                                                                                     5
  Authoritative Guidance                                                                     6
  How to Use This Checklist                                                                  6

Requirements Checklist                                                                       9
  Needs Determination Function                                                              10
  Inventory in Storage Function                                                             16
  Inventory Undergoing Repair or in Production Function                                     30
  Inventory Disposition Function                                                            36
  Program Planning and Monitoring Function                                                  46


Figure

  Figure 1: Agency System Architecture                                                       5


Abbreviations

  EOQ     economic order quantity
  FFMIA   Federal Financial Management Improvement Act of 1996
  JFMIP   Joint Financial Management Improvement Program
  OMB     Office of Management and Budget




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Page 4     GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
OVERVIEW


The Federal Financial Management Improvement Act (FFMIA) of 1996 requires, among
other things, that agencies implement and maintain financial management systems that
substantially comply with federal financial management systems requirements. These
system requirements are detailed in the Financial Management Systems Requirements
series issued by the Joint Financial Management Improvement Program (JFMIP) and
Office of Management and Budget (OMB) Circular A-127, Financial Management Systems.
JFMIP requirements documents identify (1) a framework for financial management
systems, (2) core financial systems requirements, and (3) 16 other systems supporting
agency operations. Figure 1 illustrates how these elements fit together in an agency
systems architecture.

Figure 1: Agency Systems Architecture




Source: JFMIP Federal Financial Management System Requirements documents.

Page 5                                   GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
To date, JFMIP has issued the framework and core documents and 7 of the 16 systems
identified in the architecture (See figure 1.).1

In December 1997, GAO issued eight exposure drafts proposing checklists for the then
eight documents in the JFMIP series. In early 1998, JFMIP decided to initiate projects to
update two of those documents (systems related to employee travel and payroll) and to
assess three others (systems related to seized/forfeited assets, direct loans, and loan
guarantees) to determine the extent updates may be needed, and if needed, to initiate
revisions. When the two documents are updated and the three are either updated or
determined not to need revision, GAO will issue related final checklists.

Until the revisions are completed, the exposure drafts reflecting the existing five system
requirements documents will be available for use to the extent agencies wish to apply
them. Also, in February 1998, JFMIP issued Managerial Cost Accounting Systems
Requirements. GAO will develop a checklist of those requirements.

Authoritative Guidance

OMB Circular A-127 and OMB's Implementation Guidance for the Federal Financial
Management Improvement Act (FFMIA) of 1996, issued September 9, 1997, provide the
basis for assessing compliance with the FFMIA requirement for agencies to implement
and maintain financial management systems that comply substantially with federal
requirements. OMB's September 1997 implementation guidance identifies various criteria
that an agency must meet to be in substantial compliance with these requirements. One
of the criteria listed in the OMB guidance is the JFMIP systems requirements series.

The source of all the questions in this checklist is the Joint Financial Management
Improvement Program Federal Financial Management System Requirements Inventory
System Requirements (FFMSR-7, June 1995).

How to Use This Guide

OMB's 1997 implementation guidance provides indicators for chief financial officers and
inspectors general to assist them in determining whether an agency's financial
management systems substantially comply with federal financial management systems
requirements. The annual assurance statement required pursuant to section 4 of the



1
 Thus far, the series includes the (1) Framework for Federal Financial Management
Systems, (2) Core Financial System Requirements, (3) Inventory System Requirements, (4)
Seized/Forfeited Asset System Requirements, (5) Direct Loan System Requirements, (6)
Guaranteed Loan System Requirements, (7) Travel System Requirements, (8) Personnel-
Payroll System Requirements, and (9) Managerial Cost Accounting System Requirements.

Page 6                                      GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
Federal Managers' Financial Integrity Act is one of those indicators. Agencies can use
GAO's checklists to help determine annual compliance with section 4 of the act.

Filling out this checklist will allow agencies to systematically determine whether specific
system requirements are being met. In determining substantial compliance, agencies
should assess the results of the completed checklist on the inventory system taken as a
whole. "No" answers should not be viewed by themselves or taken out of context.
Rather, "no" answers should be assessed as to the impact on the overall system and the
extent to which the "no" answers inhibit the entire system from meeting substantial
compliance.

In the checklist, two columns follow each question. Use the first column to answer each
question "yes," "no," or "na." Use the second column to explain your answer. A "yes"
answer should indicate that the agency's system or systems provide for the capability
described in the question. For each "yes" answer, the second column should contain a
brief description how the system(s) contain the capability and should also refer to a
source that explains or shows the capability.

A "no" answer indicates that the capability does not exist. For a "no" answer, the second
column should provide an explanation and, where applicable, a reference to any related
supporting documentation. Such explanations could include the following examples: (1)
the agency is working on modifying or implementing its system(s) to have the capability
available in subsequent years or (2) management believes the capability is not cost
effective and will not enhance the systems' ability to manage operations. Cost-benefit
studies that support each explanation should be identified in the explanation column. If
there are no cost-benefit studies or other support, a full explanation should be provided.

Not every guide may apply to each agency. Further, while a guide may be applicable to
an agency, certain questions within the guide may not be applicable. Answer such
nonapplicable question(s) with "na" and provide an appropriate explanation in the second
column.




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Page 8     GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
INVENTORY SYSTEM REQUIREMENTS

The inventory system requirements document helps agencies meet government guidance
for controlling and accounting for inventory in accordance with laws and policies.

The five functions of the inventory system are discussed below.

           1. Needs Determination is a supply or logistics function that develops quantity
              and resource requirements for inventory or production. (The checklist
              questions for this area are drawn from pp. 20-25 of the source document.)

           2. Inventory in Storage is tangible personal property that is (a) held for sale,
              (b) in the process of production for sale, or (c) to be consumed in the
              production of goods for sale or in the provision of services for a fee. (The
              checklist questions for this area are drawn from pp. 26-32 of the source
              document.)

           3. Inventory Undergoing Repair or in Production consists of the following
              processes: (a) repairing process and (b) work-in-process tracking process.
              (The checklist questions for this area are drawn from pp. 33-36 of the source
              document.)

           4. Inventory Disposition consists of the following processes: (a) loaning
              process, (b) issuing process, and (c) disposal process. (The checklist
              questions for this area are drawn from pp. 37-43 of the source document.)

           5. Program Planning and Monitoring consists of the following processes: (a)
              policies and standards process and (b) monitoring process. (The checklist
              questions for this area are drawn from pp. 44-49 of the source document.)

The checklist questions follow the JFMIP source document. It should be noted that not
all questions will apply in all situations and, as with the use of any checklist, professional
judgment should be exercised. Using the JFMIP source document and its glossary along
with the two previously mentioned OMB documents will help ensure that the user is
cognizant of the background information necessary to fully understand the questions.




Page 9                                       GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
Inventory System Requirements


  Needs determination function         Yes/no                   Explanation
                                        NA

  1. Does the system record
     customer demand and
     replenishment lead time data
     for a period of years, analyze
     the data for anomalies, and
     compute demand and lead
     time forecasts on a regular,
     frequent schedule? These
     should be reviewed regularly
     by inventory managers,
     though computer-generated
     forecasts generally should be
     changed only when
     information is available to the
     manager that is not available
     to the automated system.


  2. Does the system compute and
     routinely update the ordering
     costs, which may vary
     depending on method of
     procurement and other
     factors? The ordering costs
     might include costs of

      -- reviewing the stock
         position;
      -- preparing the purchase
         request;
      -- selecting the supplier;
         receiving, inspecting, and
         placing the material in
         storage; and
      -- paying the vendor.


Page 10                                   GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
Inventory System Requirements


  Needs determination function       Yes/no                   Explanation
                                      NA

  3. Does the system estimate and
     routinely update the per unit
     inventory holding cost, which
     is an estimate of the cost to
     hold each additional unit of
     inventory? Its primary
     elements are storage space,
     obsolescence, interest on
     inventory investment, and
     inventory shrinkage (due to
     deterioration, theft, damage,
     etc.).


  4. Does the system recompute
     the Economic Order Quantity
     (EOQ) on a regular, frequent
     schedule, using the demand
     forecast, ordering cost,
     inventory holding cost, and
     unit cost of the material? In
     lieu of the EOQ, any other
     optimum order quantity
     calculation may be used,
     provided (a) it is based on
     sound business principles and
     (b) it minimizes total cost,
     including the sum of ordering
     and inventory holding costs.




Page 11                                 GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
Inventory System Requirements


  Needs determination function         Yes/no                   Explanation
                                        NA

  5. Does the system recompute
     the safety stock, if any, on a
     regular and frequent schedule?
     The safety stock may include
     variables manipulated by
     management to establish
     intended service levels.


  6. Does the system recompute
     the reorder point level on a
     regular and frequent schedule,
     considering stock available for
     issue, backorders, quantities
     on hold, and quantities due in?


  7. Does the system determine if
     replenishment is needed on a
     regular and frequent schedule,
     basing the determination on
     net stock and reorder point? If
     needed, immediately initiate a
     replenishment action using the
     EOQ or other order quantity,
     as described above.


  8. Does the system provide
     information on current
     inventories and historical
     usage to be used in capacity
     planning?




Page 12                                   GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
Inventory System Requirements


  Needs determination function       Yes/no                   Explanation
                                      NA

  9. Does the system establish
     overall production targets
     necessary to fill customers'
     orders and meet operating
     schedules?


 10. Does the system support the
     incorporation of component
     availability and anticipated
     lead times for delivering
     orders into a master
     production schedule?


 11. Does the system support
     predefined inspection plans
     and quality standards?


 12. Does the system support the
     budgeting of resources for
     inventories? Normally,
     budgeted resources for
     inventories are determined by
     considering (a) projected
     customer orders based on
     historical customer activity
     and (b) management decisions
     projecting future inventory
     needs.


 13. Does the system identify
     available funds by inventory
     commodity?



Page 13                                 GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
Inventory System Requirements


  Needs determination function         Yes/no                   Explanation
                                        NA

 14. Does the system distinguish
     available funds for items that
     are slow-moving and are
     carried in the inventory for
     more than one accounting
     cycle?


 15. Does the system access the
     core financial system to
     ensure that funds are available
     prior to the approval of a
     request for acquisition of
     inventory items? There must
     be a validation of available
     funds prior to release of
     requisition orders or purchase
     requests for inventory items.


 16. Does the system provide for
     reducing or terminating
     acquisitions when funds are
     limited or not available for
     new buys?


 17. Does the system identify
     funds used and rates of fund
     use by inventory commodity?


 18. Does the system control
     availability of funds by
     inventory commodity?




Page 14                                   GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
Inventory System Requirements


  Needs determination function          Yes/no                   Explanation
                                         NA

 19. Does the system calculate
     fund usage and project the
     date on which funds will be
     exhausted at the current rate
     of usage?


 20. Does the system provide to
     agency inventory managers
     and designated internal review
     officials, on a periodic or
     requested basis, at least the
     following types of
     management information:

      --   demand?
      --   procurement lead time?
      --   procurement cycle?
      --   requirements?
      --   assets?
      --   available funds?
      --   budget versus actual?
      --   rates of fund utilization?




Page 15                                    GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


            Inventory in storage function       Yes/no                   Explanation
                                                 NA

           1. Is the system integrated, at a
              minimum, with the acquisition
              and core financial systems to
              share information of items
              ordered, received, in storage,
              and sold or otherwise
              disposed of.


           2. Does the system record
              information on material
              returned by customers?


           3. Does the system record
              information on the receipt in
              sufficient detail to allow
              matching of receipt, purchase
              order/contract, and invoice for
              payment purposes? Examples
              of data to collect included
              item numbers, quantities, units
              of measure, vendors, and
              purchase order numbers.


           4. Does the system record the
              date of receipt to be used for
              purposes of the Prompt Pay
              Act and to monitor the
              timeliness of placing items
              into inventory and the age of
              inventory items?




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          Inventory System Requirements


            Inventory in storage function        Yes/no                   Explanation
                                                  NA

           5. Does the system differentiate
              between partial receipts
              against an undelivered order
              and full receipts?


           6. Does the system perform
              quantity and price conversions
              between different units of
              measure? For example, the
              item purchase unit may be
              cases and the receiving
              activity unit of measure may
              be each.


           7. Does the system identify
              transportation discrepancies
              (i.e., any discrepancy between
              the government or commercial
              bill of lading and items
              received) and initiate the
              transportation discrepancy
              report (e.g., SF 361) and
              follow-up?


           8. Does the system record items
              in transit and the quantities of
              each if title to inventory items
              transfers at the point of
              origin?




Page 17                                             GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


            Inventory in storage function      Yes/no                   Explanation
                                                NA

           9. Does the system record the
              acceptance or rejection of
              new or returned items at their
              destination and the quantities
              of each? Does it update
              inventory on hand information
              as a result?


           10. Does the system record the
               date of acceptance for
               purposes of the Prompt Pay
               Act?


           11. Does the system provide
               information on items received
               and accepted necessary to
               support the payment
               management function of the
               core financial system?


           12. Does the system provide
               customer credit/refund on
               items returned in accordance
               with the agency's return
               policy?




Page 18                                           GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


            Inventory in storage function        Yes/no                   Explanation
                                                  NA

           13. Does the system identify
               shipping discrepancies (e.g.,
               SF 364) and product quality
               deficiencies (e.g., SF 368)
               between the items received
               and the information provided
               on shipping documents and
               purchase orders? Does it
               support the follow-up on
               discrepancies conducted by
               the procurement and finance
               offices?


           14. Does the system identify the
               intended location of the item
               and track its movement from
               the point of initial receipt to
               its final destination?


           15. Does the system record
               identifiers, quantities,
               condition, location, and other
               elements necessary to
               establish physical control?


           16. Does the system classify
               inventory items by commodity
               class to meet agency needs
               for management and control?




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          Inventory System Requirements


            Inventory in storage function       Yes/no                   Explanation
                                                 NA

           17. Does the system distinguish
               between the unit cost of an
               inventory item and its selling
               price?


           18. Does the system maintain
               sufficient information to
               support the inventory
               valuation method chosen in
               the Program Planning and
               Monitoring function (e.g.,
               historical cost using First-In
               First-Out (FIFO), weighted
               average, or moving average
               cost flow assumptions or the
               latest acquisition cost)?


           19. Does the system allow the
               cost of an item to include all
               appropriate purchase,
               transportation, and production
               costs incurred?




Page 20                                            GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


            Inventory in storage function      Yes/no                   Explanation
                                                NA

           20. Does the system categorize
               inventory items as described
               in SFFAS No. 3 as (a)
               inventory held for sale, (b)
               inventory held in reserve for
               future sale, (c) excess,
               obsolete, and unserviceable
               inventory, or (d) inventory
               held for repair? These
               categories shall be used for
               financial statement purposes.




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          Inventory System Requirements


            Inventory in storage function        Yes/no                   Explanation
                                                  NA

           21. Does the system provide
               financial information in the
               appropriate format and using
               the appropriate method to
               other financial management
               systems used by the agency?
               For example:

               -- Provide total cost
                  information by financial
                  category for items added
                  into inventory to the core
                  financial system for posting
                  by the General Ledger
                  Management function and
                  the Cost Management
                  function.
               -- If the agency has a cost
                  accounting system to
                  support a manufacturing,
                  industrial fund, or similar
                  function, provide cost and
                  other appropriate
                  information on items
                  provided to that other
                  function.


           22. Does the system provide
               information needed to support
               reconciliation between the
               inventory system's records
               and other systems' records?




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          Inventory System Requirements


            Inventory in storage function         Yes/no                   Explanation
                                                   NA

           23. Does the system provide
               support for physical
               verification of inventory
               balances by location and type?


           24. Does the system record
               changes in physical condition
               (e.g., excellent, good, fair, or
               poor), quantities, etc., based
               on the results of physical
               inventory verifications?


           25. Does the system provide for
               the matching of physical
               counts with inventory quantity
               and financial records through
               cycle counting or other
               inventory management
               techniques if the agency
               maintains perpetual inventory
               records?


           26. Does the system provide for
               reconciliation using beginning
               of period inventory balances,
               receipts, and dispositions up
               to the cutoff point for the
               physical inventory if the
               agency does not maintain
               perpetual inventory records?




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          Inventory System Requirements


            Inventory in storage function          Yes/no                   Explanation
                                                    NA

           27. Does the system ensure the
               retention of records of
               physical inventory counts until
               (a) the count is reconciled,
               (b) all adjusting entries for the
               physical count are resolved
               and entered into the financial
               records, and (c) the next
               physical count is
               accomplished, reconciled, and
               entered into the records?


           28. Does the system provide for
               identification of all errors
               arising from reconciliation
               processes that apply to a time
               period prior to the last
               inventory adjustment? All
               such errors must be corrected
               to include appropriate
               adjustments to prior gains and
               losses.


           29. Does the system record
               changes in the location of an
               inventory item, such as from
               one warehouse to another,
               and any associated changes in
               the person or organization
               responsible for stewardship of
               the item?




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          Inventory System Requirements


            Inventory in storage function        Yes/no                   Explanation
                                                  NA

           30. Does the system record the
               value and quantities of items
               in transit from one location to
               another?


           31. Does the system record losses
               from the recognition of
               destroyed, lost, or pilfered
               items?


           32. Does the system send the
               appropriate information to the
               core financial system and cost
               accounting system to ensure
               that they stay in balance with
               the inventory system if
               financial adjustments are
               required as a result of a
               physical verification?


           33. Does the system adjust
               inventory item costs for
               significant differences
               between the amount recorded
               for the items upon receipt and
               the invoiced amounts paid for
               the goods?




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          Inventory System Requirements


            Inventory in storage function        Yes/no                   Explanation
                                                  NA

           34. Does the system generate
               financial transactions to
               record the transfer of
               inventory between financial
               categories such as from
               inventory held for sale to
               excess, obsolete, and
               unserviceable inventory, or
               between cost categories as
               defined for internal
               management? Does it send
               this information to the core
               financial system and cost
               accounting system as
               appropriate?


           35. Does the system value excess,
               obsolete, and unserviceable
               inventory at expected net
               realizable value? The
               difference between the
               carrying amount of the
               inventory before identification
               as excess, obsolete, or
               unserviceable and its expected
               net realizable value shall be
               recognized as a loss (or gain)
               and either separately reported
               or disclosed. Any subsequent
               adjustments to its net
               realizable value or any loss
               (or gain) upon disposal shall
               also be recognized as a loss
               (or gain).


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          Inventory System Requirements


            Inventory in storage function       Yes/no                   Explanation
                                                 NA

           36. Does the system recognize
               and record unrealized holding
               gains/losses when using the
               latest acquisition cost method
               for valuing inventory?


           37. Does the system calculate the
               historical cost of ending
               inventory and cost of goods
               sold using the cost flow
               assumption (e.g., FIFO,
               weighted average, moving
               average, or standard cost)
               chosen by the agency in
               accordance with SFFAS No. 3
               when using the historical cost
               method for valuing inventory?


           38. Does the system make
               adjustments to inventory
               valuations to reflect net
               realizable value instead of
               historical cost or latest
               acquisition cost if the
               conditions specified in SFFAS
               No. 3 under "Exception to
               Valuation" are met or if the
               inventory is declared to be
               excess, obsolete, or
               unserviceable in accordance
               with SFFAS No. 3?




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          Inventory System Requirements


            Inventory in storage function       Yes/no                   Explanation
                                                 NA

           39. Does the system maintain the
               distinction between the cost
               of inventory items and selling
               price? Does it make
               adjustments to them
               separately?


           40. Does the system compute the
               value of items on the property
               records by multiplying
               quantities on hand or on loan
               by the unit cost of the
               applicable item? These values
               are totaled and the sum
               reconciled with the general
               ledger value.


           41. Does the system record the
               value and quantity of items
               shipped from contractors or
               vendors for which title has
               passed to the government?


           42. Does the system record the
               value and quantity of items
               shipped from the inventory
               organization to another
               organization for which
               accountability has been
               retained by the inventory
               organization until receipt by
               the recipient?



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          Inventory System Requirements


            Inventory in storage function       Yes/no                   Explanation
                                                 NA

           43. Does the system record the
               value and quantity of items
               identified as in transit being
               moved from one inventory
               storage location to another?


           44. Does the system provide at
               least the following types of
               management information:

               -- unfilled orders?
               -- discrepancies?
               -- acceptance and rejection
                  summary?
               -- days supply?
               -- master inventory?
               -- inactive stock?
               -- item expiration/shelf life?
               -- cycle count?
               -- inventory accuracy?




Page 29                                            GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


           Inventory undergoing repair or       Yes/no                  Explanation
               in production function            NA

           1. Does the system record the
              transfer of an inventory item
              from its current status to the
              status of "in repair?" Does it
              provide information to the
              core financial system to
              record the change in financial
              category?


           2. Does the system adjust the
              valuation of inventory items in
              accordance with the repair
              accounting treatment selected
              by the agency in conformance
              with SFFAS No. 3?


           3. Does the system establish an
              allowance for repairs
              consistent with the estimated
              annual cost of repairs if using
              the allowance method?


           4. Does the system identify the
              costs of repair activities?




Page 30                                           GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


           Inventory undergoing repair or       Yes/no                  Explanation
               in production function            NA

           5. Does the system account for
              repair costs as a charge to the
              allowance account, a
              capitalization in the inventory
              account up to the value of a
              serviceable item, or a repair
              expense, depending on the
              accounting method used and
              the types and costs of repair?


           6. Does the system separately
              identify prior period amounts
              for repair expense and record
              the appropriate accounting
              adjustments when
              transitioning to a new repair
              accounting method?


           7. Does the system record the
              transfer of an inventory item
              from the status of "in repair"
              to its proper status and
              location? Provide information
              to the core financial system to
              record the change in financial
              category?


           8. Does the system transfer
              items determined to be
              unserviceable to the disposal
              process?




Page 31                                           GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


           Inventory undergoing repair or      Yes/no                  Explanation
               in production function           NA

           9. Does the system support the
              establishment (including
              technical specifications and
              accounting classification
              needed by the inventory
              system) of orders to be placed
              with a contractor or other
              government entity to perform
              production work on items
              needed?


           10. Does the system project the
               production elements
               necessary to complete the
               production cycle? These
               production elements must
               reflect bills of material,
               manufacturing requirements,
               and production time to
               produce or repair products.




Page 32                                          GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


           Inventory undergoing repair or         Yes/no                  Explanation
               in production function              NA

           11. Does the system provide
               financial information in the
               appropriate format and
               method to other financial
               management systems used by
               the agency? For example,
               does it provide work-in-
               process costs by the
               designated accounting
               classification structure (e.g.,
               fund, program, organization,
               project, or object class) to the
               core financial system for
               posting by the General Ledger
               Management function and the
               Cost Management function?


           12. Does the inventory system
               accept cost and other
               appropriate information from
               the agency's cost system if the
               agency has a separate cost
               accounting system to support
               cost accumulation by work
               elements, such as job order,
               activities, products, etc.?




Page 33                                             GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


           Inventory undergoing repair or        Yes/no                  Explanation
               in production function             NA

           13. Does the system track
               accumulated costs, which
               should include the value of
               direct materials, direct labor,
               and overhead where
               applicable (including standard
               costs and rates, if applicable)
               for work in process?
               Percentage of completion
               information should be used to
               value work in process.


           14. Does the system provide
               features to record unit costs
               and prices of products and
               services?


           15. Does the system transfer
               work in process to finished
               goods for inventory
               categorization and accounting
               purposes?


           16. Does the system identify the
               intended location of the item
               and track its movement from
               the point of initial receipt to
               its final destination?




Page 34                                            GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


           Inventory undergoing repair or       Yes/no                  Explanation
               in production function            NA

           17. Does the system record
               identifiers, quantities,
               condition, location, and other
               elements necessary to
               establish physical control?


           18. Does the system classify
               inventory items by commodity
               class or type to meet agency
               needs for management and
               control?


           19. Does the system provide at
               least the following types of
               management information:

               -- repair status?
               -- production order?
               -- work in process tracking?




Page 35                                           GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


           Inventory disposition function        Yes/no                  Explanation
                                                  NA

            1. Does the system record
               changes in the location of the
               inventory items and the
               associated changes in the
               person or organization
               responsible for stewardship of
               the item?


           2. Does the system record the
              value and quantities of items
              in transit from one location to
              another?


           3. Does the system record the
              transfer of an inventory item
              from the status of "on loan" to
              its proper status and location?


           4. Does the system adjust the
              value of items being returned
              in worse condition or that are
              not returned at all?


           5. Does the system generate the
              appropriate financial
              transactions if the financial
              category needs to be changed
              to "held for repair" or "excess,
              obsolete, or unserviceable?"




Page 36                                            GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


           Inventory disposition function      Yes/no                  Explanation
                                                NA

           6. Does the system verify that
              the customer order is received
              from an eligible customer who
              is authorized to use the
              system and order the items?


           7. Does the system record the
              fund citation provided by the
              customer so that it may be
              included on billings?


           8. Does the system ensure that
              inventory items issued are
              limited to available funds
              provided by the customer?


           9. Does the system advise the
              customer of the new price if
              available funds are expected
              to be exceeded because of
              price changes, etc.? If
              requested by the customer,
              performance and/or shipment
              should be withheld until the
              customer has provided the
              additional funds required or
              has been given an opportunity
              to cancel or reduce the order.




Page 37                                          GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


           Inventory disposition function          Yes/no                  Explanation
                                                    NA

           10. Does the system establish and
               maintain customer records if
               customers are billed or if
               trackings of individual
               customer data, business
               history, and preferences are
               important to the program?


           11. Does the system record
               relevant information on the
               customer order, including
               items ordered; quantities
               requested; customer name and
               address; specifications, if
               appropriate; date received;
               and other data needed
               consistent with the inventory
               program?


           12. Does the system record the
               fund citation provided if the
               customer is a federal agency?


           13. Does the system issue stock
               and backorder the balance as
               policy permits when
               insufficient stock is available
               to fulfill the total requirement?




Page 38                                              GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


           Inventory disposition function       Yes/no                  Explanation
                                                 NA

           14. Does the system send special
               orders, orders for services or
               goods to be manufactured to
               specification, and other
               similar orders to the Needs
               Determination function?


           15. Does the system determine
               and record the value of the
               customer order?


           16. Does the system send a
               transaction to the core
               financial system to record
               receipt of an unfilled
               customer order?


           17. Does the system recognize
               budgetary resources only up
               to the amount of cash
               received, unless otherwise
               authorized by statute if the
               customer is not a federal
               agency?


           18. Does the system recognize
               budgetary resources for the
               entire amount if the customer
               is a federal agency?




Page 39                                           GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


           Inventory disposition function        Yes/no                  Explanation
                                                  NA

           19. Does the system , if checks or
               cash are received with the
               customer order, record it
               against the customer order
               and send the information to
               the Receipt Management
               function of the core financial
               system?


           20. Does the system prepare
               picking lists to be used in
               pulling inventory items from
               storage?


           21. Does the system reduce
               quantities on hand by the
               number of items removed?


           22. Does the system provide
               advice to customers on
               shipments of material so that
               the customers may establish
               financial controls, as
               applicable, over shipments in
               transit from suppliers, and to
               establish the point of transfer
               of title? Title to inventory
               items may be passed to the
               customer at the point of sale
               or the point of destination,
               depending on the sales
               agreement with the customer.



Page 40                                            GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


           Inventory disposition function          Yes/no                  Explanation
                                                    NA

           23. Does the system maintain
               records of items issued,
               including quantities, shipment
               methods, dates, destinations,
               etc., to assist in the resolution
               activities?


           24. Does the system compare
               customer order records to
               issue records and flag any
               differences for follow-up?


           25. Does the system determine
               the appropriate price for a
               particular customer order
               using the pricing models and
               formulas defined in the
               Pricing Method Definition
               activity?


           26. Does the system provide
               quality controls to ensure that
               all appropriate costs have
               been provided to the pricing
               formula for a particular
               customer order?




Page 41                                              GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


           Inventory disposition function          Yes/no                  Explanation
                                                    NA

           27. Does the system develop the
               information necessary to
               prepare an initial invoice for a
               customer that provides
               adequate support for the
               prices charged?


           28. Does the system prepare
               either the initial invoice itself
               or pass the information
               required to the core financial
               system for it to prepare the
               invoice?


           29. Does the system provide the
               core financial system with the
               data necessary to establish the
               receivable and support
               subsequent administration of
               the receivables management
               and collection process?


           30. Does the system decrease the
               inventory (finished goods)
               account and increase the cost
               of goods sold account by the
               amount at which the inventory
               items sold are valued (cost)?




Page 42                                              GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


           Inventory disposition function        Yes/no                  Explanation
                                                  NA

           31. Does the system record
               revenue and the appropriate
               offsetting account (e.g., cash,
               receivables, or advances) in
               the amount for which the
               inventory items are sold
               (price)?


           32. Does the system record the
               value of items issued from
               storage or shipped to
               customers for which title does
               not pass to the customer until
               a subsequent event occurs?


           33. Does the system decrease the
               quantity of the inventory item
               on hand by the number of
               items sent to the disposal
               organization?


           34. Does the system record
               confirmation of receipt of the
               items by the disposal
               organization?




Page 43                                            GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


           Inventory disposition function       Yes/no                  Explanation
                                                 NA

           35. Does the system recognize
               asset transfers and/or losses
               as appropriate and in
               accordance with SFFAS No. 3
               for items designated as
               excess, obsolete, or
               unserviceable, including items
               (a) transferred to other
               federal agencies under
               mandated federal utilization
               programs, (b) sold as scrap,
               or (c) donated to state and
               local governments under
               mandated federal donation
               programs?


           36. Does the system transfer
               balances between financial
               categories, for example, from
               "inventory held for sale" to
               "excess, obsolete, and
               unserviceable inventory?"


           37. Does the system account for
               the proceeds resulting from
               disposition of inventory items
               as scrap?




Page 44                                           GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


           Inventory disposition function     Yes/no                  Explanation
                                               NA

           38. Does the system provide at
               least the following types of
               management information:

               --   loaned items?
               --   stock availability?
               --   customer order?
               --   inventory turnover?
               --   stock usage?
               --   losses?
               --   disposals?




Page 45                                         GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


               Program planning and             Yes/no                   Explanation
                monitoring function              NA

           1. Does the system establish
              price computation models or
              formulas to be used in the Bill
              Calculation activity? Pricing
              models for federal entities are
              usually based on costs
              incurred, but may be based on
              other factors, such as specific
              legislation for the agency,
              utility, and condition.


           2. Does the system provide
              methods to support pricing by
              groupings or commodities of
              items?


           3. Does the system identify
              separate methods of pricing
              needed based on statutory
              authority or other agency
              policy? For example, the
              pricing method used may
              depend on the nature of the
              customer, such as within the
              same agency, another federal
              agency, a U.S. corporation or
              citizen, or a foreign
              government.




Page 46                                            GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


               Program planning and            Yes/no                   Explanation
                monitoring function             NA

           4. Does the system provide
              quality controls over input
              data to the pricing model to
              ensure that all appropriate
              costs are included and are
              accurate?


           5. Does the system establish
              methods or formulas to be
              used in valuing and
              accounting for inventory
              based on cost? Costs to be
              considered for inventory held
              for sale include appropriate
              purchase, transportation, and
              production costs incurred to
              bring the items to their
              current condition and
              location.


           6. Does the system establish
              appropriate cost methods that
              apply to the various types of
              inventories held by an agency?
              Different methods might also
              be needed for inventory held
              for sale based on the type of
              items, such a medical
              supplies, perishable goods,
              and hazardous materials.




Page 47                                           GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


               Program planning and            Yes/no                   Explanation
                monitoring function             NA

           7. Does the system establish
              methods to maintain the net
              realizable value of inventory
              items?


           8. Does the system establish
              methods or formulas to be
              used in valuing and
              accounting for inventory in
              the process of production
              based on cost? Costs to be
              considered for inventory in
              repair or in the process of
              production (work in process)
              include materials, labor, and
              overhead used to convert the
              items to a finished product.


           9. Does the system establish
              appropriate cost methods that
              apply to the various types of
              inventories involved in the
              production process? Different
              methods might be needed to
              assign costs to raw materials,
              work in process, and finished
              goods in a manufacturing
              entity.




Page 48                                           GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


                Program planning and            Yes/no                   Explanation
                 monitoring function             NA

           10. Does the system establish
               methods to capture and
               accumulate costs for work in
               process that account for
               repair or manufacturing
               performed by an independent
               third party, such as
               contractors or other
               government activities? The
               cost for work in process will
               be based on documented cost
               incurred. The process used to
               validate such work-in-process
               costs should be based, to the
               maximum extent possible, on
               reporting mechanisms used
               for contract management,
               project management, or other
               similar purposes.


           11. Does the system provide the
               ability, where the standard
               cost method is being used to
               record costs for work in
               process, to record standard
               costs and actual costs for
               each inventory item, in order
               to support usage and cost
               variance analysis? Standard
               costs will include the
               anticipated amounts of
               material, labor, overhead, and
               other applicable factors.




Page 49                                            GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


                Program planning and           Yes/no                   Explanation
                 monitoring function            NA

           12. Does the system track actual
               and standard cost variances
               for materials (price and
               usage), labor (rate and
               efficiency), and overhead
               (actual and applied) when a
               standard cost method is used?


           13. Does the system establish
               exception thresholds, perform
               cost analysis, and monitor
               trends and variances?


           14. Does the system record
               reasons for significant
               deviations between standard
               and actual costs?


           15. Does the system provide
               capabilities to support
               adjustments of rates and
               dispositions of variances by
               performing periodic
               allocations?


           16. Does the system match costs
               and revenues within the
               periods they were incurred or
               realized to identify gains or
               losses from sales?




Page 50                                           GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
          Inventory System Requirements


                Program planning and             Yes/no                   Explanation
                 monitoring function              NA

           17. Does the system support
               analysis of operations on an
               annual basis to determine if
               revenues are sufficient to
               cover the costs of the entire
               inventory program?


           18. Does the system provide
               sufficient transaction audit
               trails to support balances of
               inventory shown on the
               agency's general ledger and
               changes in those balances?


           19. Does the system maintain the
               documentation supporting
               inventory transactions until it
               is audited for accuracy and
               approved by external financial
               auditors, but not for less than
               3 years? Retention may be
               longer when (a) required by
               regulations, (b) there is a
               possibility of legal action
               involving the inventories, or
               (c) contract terms or
               modifications require longer
               retention.




Page 51                                             GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
           Inventory System Requirements


                 Program planning and            Yes/no                   Explanation
                  monitoring function             NA

            20. Does the system provide at
                least the following types of
                management information:

                --   cost per dollar of sales?
                --   operations cost?
                --   performance measures?
                --   audit trails?




(922252)



Page 52                                             GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
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