A well-executed inventory count can provide valuable insight into improving operational efficiency.
            
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December 13, 2016

Minimize the Hassle of Your Next Physical Inventory Count

Hi There!,

Do you dread the year-end physical inventory count? Business owners and managers often view these procedures as time consuming and disruptive. But a well-executed inventory count is more than a matter of compliance. It can also provide valuable insight into improving operational efficiency. Here’s how to run your count to maximize the benefits and minimize the hassle.

The basics

Inventory includes raw materials, work-in-progress and finished goods. Your physical inventory count also may include parts and supplies inventory. Under U.S. Generally Accepted Accounting Principles (GAAP), inventory is recorded at the lower of cost or market value.

Estimating the value of inventory may involve subjective judgment calls, especially if your company converts raw materials into finished goods available for sale. For example, the value of work-in-progress inventory includes overhead allocations and, in some cases, may require percentage-of-completion assessments.

A moving target

The inventory count gives a snapshot of how much inventory is on hand at year end. The value of inventory is always in flux, as work is performed and items are delivered or shipped. To capture a static value, it’s essential that business operations “freeze” while the count takes place.

Usually, it makes sense to count inventory during off-hours to minimize the disruption to business operations. Larger organizations with multiple locations may be unable to count everything at once. So, larger companies often break down their counts by physical location.

Proactive planning

Planning is the key to minimizing disruptions. Before counting starts, management can:

  • Order (or create) prenumbered inventory tags,
  • Meet with the inventory team to review inventory count procedures,
  • Assign workers to count inventory using two-person teams to prevent fraud (see Would You Recognize Inventory Fraud? below),
  • Write off any unsalable items,
  • Precount and bag slow-moving items, and
  • Segregate obsolete and/or customer-owned inventory.

If your company issues audited financial statements, your audit team will be present during the physical inventory count. They aren’t there to help count inventory. Instead, they’ll observe the procedures, review written inventory processes and cutoffs, evaluate internal controls over inventory, and perform independent counts to compare to your inventory listing and counts made by your employees.

After the count

When the inventory count is complete, it’s critical to record the counts and investigate discrepancies.

Contact Moore Stephens Doeren Mayhew with any questions about your physical inventory process.

Sincerely,


 

 

 

 
Anne Taros, CPA
Director
LinkedIn
Twitter: @MooreStephensDM

Anne Taros assists a variety of clients with business and tax-related issues domestically and abroad. She works with small and mid-sized clients in the manufacturing, service, retail and wholesale industries, offering business advisory services, general ledger management, and tax planning and compliance. Contact Anne at taros@moorestephensdm.com or (248) 244-3160.

Would Your Recognize Inventory Fraud?

James Noteman, CPA

Is your inventory being stolen by dishonest employees or customers? Inventory is a prime target for fraud schemes, second only to cash. And it doesn’t always involve the physical theft of items. Here are some early warning signs that your inventory has been targeted.

Know your risk profile

Some companies are more at risk for inventory fraud than others. Obviously, service companies with minimal inventory on hand bear little risk of inventory embezzlement; instead, it’s more common among retailers, manufacturers and contractors. In general, higher-value inventory items, such as electronics or jewelry, tend to be more attractive to thieves.

Sometimes, however, the inventory account is just a convenient place to hide financial misstatement ploys, such as skimming or bogus sales. Thousands of journal entries are typically made to the inventory account, and it’s closed out to cost of sales each year. So, thieves with access to the accounting systems may bury their scams in the inventory account. Then, victim-organizations may write off discrepancies between the computerized perpetual inventory records and physical inventory counts as external pilferage, obsolescence or errors — when, in fact, it’s due to intentional manipulation of the accounting systems.

Monitor inventory metrics

If your year-end inventory counts aren’t adding up, don’t just write off the discrepancy as a cost of doing business; investigate why. You can shed light on the situation by computing various inventory ratios, including:

  • Days in inventory (average inventory divided by annual cost of sales times 365 days),
  • Gross margin (sales minus cost of sales) as a percentage of sales,
  • Inventory as a percentage of total assets,
  • Returns as a percentage of annual sales, and
  • Shipping costs as a percentage of sales.

These metrics should be consistent over time and comparable to industry benchmarks. Sudden changes require immediate action.

Catch fraud early

The median duration — from inception to detection of a fraud scam — is 18 months, according to the 2016 Report to the Nations on Occupational Fraud and Abuse by the Association of Certified Fraud Examiners. Many victims are unaware that inventory balances are inaccurate until they’ve accrued substantial losses. Diligent managers know the signs of inventory fraud and can identify anomalies early. Contact us for help investigating a suspected inventory scam.

What You Need to Know NOW About FATCA

The Foreign Account Tax Compliance Act - commonly referred to as FATCA - requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts and income held by U.S. citizens on foreign accounts with more than $50,000. It also increases the due diligence and reporting by U.S. banks and financial institutions.

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  • Alternative Model Inter-Governmental Agreements (IGAs).
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