Maintaining Accurate Inventory Numbers is Crucial1 min read

by | Blog

Inventory is a significant dollar amount on the company’s financial statements. It is critical that recorded inventory balances are true. When these accounts aren’t properly stated, the cost of goods sold and current ratios – numbers that often matter to decision makers – may be skewed. Banks will most likely not extend credit to company’s whose inventory numbers are skewed. If, when necessary, inventories aren’t “written down” (their values lowered in the accounting records), fraud may go undetected or the company’s net profits may appear better than they are in actuality.
For a variety of reasons, inventories decline in value. You might be in the business of selling technology widgets to retail customers. Over time, yesterday’s “latest and greatest” gadgets become today’s same old commodities. Such goods still have value, but they can’t be sold at last year’s prices. Your inventory is experiencing “obsolescence.”
Have you heard of inventory “shrinkage”? This is a term that’s often used to describe declining inventory values. Let’s say you run a construction materials company. Unbeknownst to you, a dishonest supervisor is skimming goods from your shelves. A periodic inventory count that’s compared to your company’s general ledger might show that inventory is declining faster than it’s being sold. As a result, you may decide to investigate and to reduce inventory values in your accounting records.
Other examples of shrinkage might include a clothing store that loses inventory due to shoplifting or a warehouse facility that’s hit by a storm. In both cases, inventories may need to be written down in the company books to more accurately reflect actual values. Under another scenario, a shady supplier might bill your company for goods that aren’t actually shipped or received. If invoices are recorded in your accounting records at full cost, your inventory may end up being overstated.
For some companies, several sources feed into inventory values. A manufacturing concern, for example, might add all the expenses needed to prepare goods for sale – including factory overhead, shipping fees, and raw material costs – into inventory accounts. When those supporting costs fluctuate, inventory accounts are often affected.
In order to make sure inventory numbers remain accurate, it’s a good idea to conduct regular physical counts and routinely analyze the accounts for shrinkage, obsolescence, and other evidence of diminishing value.

By Kathy Hopkins

Kathy has been a practicing accountant since 1985 and provides a vast repertoire of services that include budget comparison, reporting and analysis, QuickBooks® training, cash flow projections, financial analysis, compilations, reviews, audit preparation and management, as well as strategic planning.

View bio | Read more articles

Here are a few additional articles you might be interested in:

Staff Accountant

JOB DESCRIPTION Position: Staff Accountant Department: Accounting Status: Full Time Position Summary The Staff Accountant provides intermediate to advanced accounting services to a regular portfolio of customers. Responsibilities Chargeable work (83% of total hours)...

read more

Should You Elect Out of the New Partnership Audit Rules?

The Bipartisan Budget Act signed into law in 2015 and effective for partnership returns filed for taxable years beginning after 2017 has significant impacts on partnership audits. Most notably that audit adjustments are to be recognized in the year an audit is...

read more

Senior Tax Accountant

JOB DESCRIPTION Position: Senior Accountant Department: Tax Status: Full-time Position Summary The Senior Tax Accountant prepares complicated individual and corporate returns, and ensures that junior members of the department perform work to a high level....

read more

Can we help you find something?

Want to continue the conversation?

Share This