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
Page 3 GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
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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?
Page 16 GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
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?
Page 19 GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
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.
Page 21 GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
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?
Page 22 GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
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?
Page 23 GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
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?
Page 25 GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
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).
Page 26 GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
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?
Page 27 GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
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?
Page 28 GAO/AIMD-98-21.2.4 - Inventory System Checklist (5/98)
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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Address Correction Requested
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)