Physical Inventory Planning

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It’s that time of year when companies need to begin preparing for their year-end inventory counts. The difference between a clean inventory count and one with multiple mistakes is due to a few key steps, which include preparing for the count, determining the method of completing the count, evaluating the counts and correcting the inventory records.

Preparing for inventory counts

Prior to the year-end inventory count, the company should have very clear, set out instructions that are communicated to all employees involved in the physical inventory process. These instructions should be discussed in advance so employees are aware of what needs to be done. Some of the typical steps discussed in these instructions include: the timing of inventory prep work, segregation of items to be excluded from counts, pre-counts that can be conducted, count teams, a map showing areas to be counted by these specific count teams, and the process in which counts will occur and be recorded.

Methods and procedures to conduct inventory count

There are three main methods used to conduct an inventory count: Pre-generated count sheets, blank count sheets or tags. Pre-generated count sheets typically list information regarding all inventory items; however, it is important that these sheets do not include the quantity on hand. This will ensure that the counting staff actually performs their own counts as opposed to relying on the amount given in the system. Blank count sheets require that the counters fill out all information. Last, tags can be used for counts, which are later accumulated. Regardless of the method chosen, there should be a responsible designated individual to have control over these count sheets to ensure everything is organized as well as complete.

Counters should be given a designated section to count and are sometimes paired in groups of two. In these instances, one individual will do the count while the other individual records. Additionally, each section should have a supervisor overseeing the count and the supervisor should perform recounts of a sample of the counts in the designated section. This will assist in catching any counts that might be off. Count sheets or tags should be signed off to indicate the individual that counted each item. This is done in the event there are areas with multiple counting errors, where recounts will need to be concentrated. Also, this is done to follow up on any discrepancies in handwritten count items. Completion of the counts should also include procedures to ensure that all areas and inventory items have been counted.

Inventory movement should be postponed until after all counts have been complete to avoid miscounts. In the event that your company has an audit, this movement should be postponed until after the auditors have completed their inventory observation as well. If it is not possible to completely stop the movement of inventory there should be documented instructions on how this movement will be monitored as well as reconciled. If this is not done accurately, it can lead to difficulty in reconciling to the inventory system. In severe cases, this may lead to an entire recount.

Evaluating the counts

Once the counts are complete these should be entered in the inventory software to adjust for missing items and to reflect proper counts. Variance reports should be run to identify discrepancies and material variances, as determined by management, should be recounted by someone that is not part of the original count team for that item. Once management is comfortable that all physical inventory counts are correct, these adjustments should be pushed through the system and final inventory reports should be run.

If an inventory is planned and prepared for properly, there should be minimal issues leading up to and during the inventory count. Therefore, it is always a good idea to get a good plan together well in advance of your inventory count and communicate the roles and expectations to all parties involved.

By Brie C. Keckler, CPA