Statistical Estimation of a Public Utility Inventory
by MAURICE S. NEWMAN Partner, Executive Office
Presented before the Northwestern Electric Power Association, Salt Lake City—June 1970
MOST ACCOUNTANTS, whether in private or public practice, have some-where in their clothes closet an old suit they have used for participation
in the taking of physical inventories. These inventory suits have become symbolic of one of the more disenchanting aspects of accounting. Many a New Year's Eve party has been missed because it was necessary to work in a dirty warehouse, often under dim light, clambering over stock piles in order to make a complete count of all physical inventory items at the end of the year.
COMPLETE PHYSICAL COUNT
In the earlier days, the year-end complete physical count was an absolute
necessity, as this was the only way that income for the year could be determined. When perpetual inventories became a fairly general practice,
the year-end count no longer was a necessity. The physical inventory was taken and observed at some time preceding, but generally not more than one or two months before the year end. Reconciliation of the physical
counts with the perpetual records gave an indication of the degree of reliability that could be placed on the perpetual records at the year end and for interim accounting reports. The introduction of cyclical counting, in which a certain number of items would be counted weekly or monthly, and adjusted if necessary, helped to ensure a closer reconciliation between the physical count and the perpetual inventory records all through the year.
The requirement for an annual complete physical count was to remain
until 1966, when the Auditing Committee of the AICPA issued its Statement on Auditing Procedure No. 36 which recognizes inventory sampling as a permissible substitute for complete physical counts. The statement says: