The end of the year is approaching fast. For many, this means time for a physical year-end inventory count—the best way to ensure an accurate amount reported in your company’s perpetual inventory system.
Physical counts may seem tedious and time-consuming, but they can offer valuable insight into your company’s operational efficiency. Fortunately, there are some ways to streamline the process.
Preparing for your inventory count
Follow the five tips listed below to increase the efficacy of your year-end inventory count.
1. Use numbered inventory tags
Many companies use two-part tags to count their inventory: one to stay with the item on the shelf, and the other to be returned to the manager following the count. To ensure that the manager can account for every tag issued, use a tagging system to avoid double-counting or omitting items.
The best way to do this is to number your tags sequentially—whether you order pre-numbered tags or create them yourself is up to you. Either way, you’ll want the tags to be numbered and ready to go well before the count is scheduled to begin.
2. Preview your inventory
For an efficient inventory count, many companies do a test run a few days before the actual count. This helps to identify and correct any foreseeable problems (such as missing part numbers, unbagged supplies, and insufficient inventory tags). It also helps you determine how many workers to schedule for the project.
3. Assemble counting teams
To avoid fraudulent counts, it’s helpful to assemble and assign teams to specific areas of the warehouse. (A map often helps workers identify count zones.) Additionally, avoid giving workers inventory listings to reference—encourage them to bring any possible discrepancies to attention rather than duplicating the amount from the listing.
4. Write off unsaleable items
If you already know that certain items are going to be written off, such as defective or obsolete items, be sure to dispose of them properly before the inventory count begins.
5. Pre-count select items
If possible, take some time to pre-count items that aren’t expected to be used before year-end, complete with tagging and storing. If you notice a broken seal on the day of the actual count, those items should be recounted.
Value of inventory
Under the U.S. Generally Accepted Accounting Principles (GAAP), inventory is recorded at cost or market value—whichever is lower. That said, estimating the market value of inventory may require subjective judgment calls. It can be especially difficult to objectively assess the value of work-in-progress inventory, especially when it includes overhead allocations and percentage of completion assessments.
Because the value of inventory is constantly fluctuating as work is performed and items are shipped and delivered, the best way to capture a static value is to “freeze” operations while the count takes place. This could involve counting inventory during off hours or breaking down counts by physical location.
If your company issues audited financial statements, at least one member of your external audit team will observe the physical inventory count.
The auditor’s roles include:
- Observing procedures, including statistical sampling methods
- Reviewing written inventory processes
- Evaluating internal controls over inventory
- Performing independent counts for comparison
- Looking for obsolete, broken, or slow-moving items that should be written off
Be prepared to provide your auditors with invoices and shipping/receiving reports, which will be used to evaluate cutoff procedures and confirm reported values.
Work with an advisor
If you’re concerned about your physical inventory counting procedures, our advisors can help you get it right, including investigating any discrepancies between your inventory count listing and the amount reported in your perpetual inventory system.
Contact us to get started.