Minimize the Hassle of Your Next Physical Inventory Count
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.
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.
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.
Anne Taros, CPA
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 email@example.com or (248) 244-3160.