United States: Tips For Ensuring A Successful Year-End Inventory Count

Last Updated: January 5 2017
Article by Jason Emery CPA, MSA

For many people, the end of each year brings with it a time for family and friends, holiday celebrations and hopefully a chance to take some unused vacation days.  Unfortunately, this can also be one of the most challenging times of year for businesses, as the period just before the start of the New Year frequently requires completion of physical inventory counts.

Successful inventory counts and the updating of accounting records is paramount in accurate financial reporting. Not only does a company's inventory balance often serve as collateral for borrowing, the results of an inventory observation could have a material impact on the financial statements, particularly if obsolete or damaged items are identified, or if quantities from the observation do not agree with inventory records.

As auditors, we routinely observe and perform test counts on year-end inventory for our audit clients, and have noted several ways these counts can be improved from both an accuracy and efficiency perspective.

Following are some tips and recommendations for ensuring that your inventory procedures go smoothly and that headaches are avoided after the New Year.

Instructions

Inventory instructions can serve as a strong foundation for count procedures. Employees at different levels within an organization may be involved with performing inventory counts at year-end. Given the complexity that inventory procedures can entail, getting those involved on-board and familiar with the process well in advance goes a long way towards ensuring that inventory is accounted for timely and accurately. Including the following items in the inventory instructions may be beneficial:

  • Time and location the inventory will be taking place
  • The individual responsible for each area and overall completion of the counts
  • When, if any, stops in production and/or shipping and receiving will occur
  • Any specific unit of measure considerations
  • Any work in process items that employees should be aware of
  • How and when internal reconciliation procedures will be handled
  • A layout of the area/areas to be counted

Variance Analysis

Comparing inventory counts to a benchmark is one approach that a company can utilize to ensure accurate results. Even when inventory is counted (and perhaps re-counted), having a benchmark number to compare the counts to is a good way to determine whether additional procedures should be performed before the count numbers can be relied upon. A company may have a reliable periodic system, whereby the year-end counts can be compared to the system at that point in time. It may be beneficial to establish thresholds (for instance, plus or minus 5% of the system number) to indicate whether or not items need to be flagged for follow-up after they are counted. Blindly updating the inventory records after one count can make them more susceptible to human error. Variance analysis can identify items that were not counted properly or perhaps not counted at all.

Tracking System

Effectively tracking inventory items is a vital aspect of the inventory count process. Two of the most common methods involve inventory tags and inventory count sheets. Typically, tags and count sheets include a full identification of each item. Inventory tags are numbered sequentially and any unneeded tags are appropriately voided. Count sheets contain a list of all items that need to be counted. Having tags, count sheets, or another way of identifying inventory on hand will aid in ensuring all items are counted and reconciled appropriately.

Damaged, Obsolete, Bill & Hold and Inventory on Consignment

It is important to remember that just because an item is physically on hand, it does not necessarily belong to the company or have value. The year-end inventory count process provides another opportunity for companies to identify any damaged or obsolete inventory, and determine whether or not those items have been appropriately reserved for or written off entirely.

Similarly, companies should be aware of any bill and hold or consignment arrangements whereby the items on hand are actually owned by another party. These items should be appropriately segregated and accounted for. Items that technically are the property of the company but at another location, or any items in transit, should be properly identified and accounted for at year-end.

Cycle Counts

Companies with effective and reliable inventory systems may not perform an annual wall-to-wall physical inventory but instead preform cycle counts. Cycle counts involve counting small portions of inventory throughout the year. Many companies will segregate their inventory into high, moderate, and slow moving items, counting portions of high moving items more frequently, moderate moving items less frequently, and slow moving items perhaps only annually.

Performing cycle counts allows management to identify potential errors at a point in time, rather than only at year-end. Doing so often makes the year-end physical count much easier, and gives employees familiarity throughout the year with how procedures need to be performed and errors evaluated, reconciled, and updated.

Supervision

A strong inventory count process can involve many resources, employees and locations, making adequate supervision a must. Having one or two designated employees as a point person(s) for the entire process gives all involved a resource to go to in the event of any errors. Placing an individual in charge who understands the count process, the items being counted, and the variance analysis review, and who has the ability to track and ensure all items are accounted for appropriately, leads to a more efficient and effective process, and holds all team members accountable.

Depending on the size and number of items being counted, a company may want to designate specific individuals to perform re-counts of certain items or all items during the process. This second set of eyes is helpful in identifying any counting errors that variance analysis may not pick up. In addition, if internal resources are not adequate, the company may find it useful to hire an outside firm to perform count procedures for them during the year, at year-end, or both.

Know What You Are Counting

As simple as it sounds, sometimes items and units of measure can be easily confused. Certain goods may have very similar identifiers and be incorrectly recorded in the inventory records. In addition, inventory may have a specific unit of measure that needs to be followed (square feet or pounds, for example) that is unique to the item or particular product line. Having a team performing counts that is familiar with both the items on hand and the appropriate unit of measure is another way to make sure all items are counted appropriately.

Limit Movement, Production Shipping and Receiving

Limiting movement of inventory during the count process is crucial to ensuring items are properly counted and proper cutoff is achieved. A high volume of shipping and receiving or work in process during counts can make it difficult to identify errors, obtain the correct counts, or properly identify cutoff of items sold.

Conclusion

This is by no means an exhaustive list of all areas where inventory counts can be improved. However, auditors observing year-end test counts will be looking for proper cutoff, correct quantities, and completeness of counts as well as indications of obsolete or damaged items. Incorporating some or all of the procedures listed above can go a long way toward streamlining your inventory count process, reporting accurate numbers, and having less headaches with your year-end audits.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.