Site logo

How to Perform Inventory Counts

March 18, 2014

Tax Question:

How would I perform an inventory count?

Facts:

Inventory counts should be performed annually at a minimum to establish the value at the year-end of your inventory on hand. Annual physical inventories help ensure the accuracy of reported inventory balances, identify obsolete or slow-moving items and help you manage your inventory levels. An inventory count should be performed in a systematic manner in order to ensure that the results can be relied upon.

Discussion:

Below are some basic procedures that should be followed to ensure a reliable count is performed:

  • Someone who knows the business and the inventory well should supervise the count and provide clear written and verbal instructions to all persons participating in the count. Ensure all instructions are discussed and understood before commencing the count.
  • If the warehouse or storage location is messy, it is a good idea to tidy up and arrange items in an orderly manner prior to the count to ensure an efficient count.
  • Participants should work in teams of two so that there is someone to count (the counter), and someone to confirm and record the count of each item (the scribe).
  • The physical account should ideally be taken outside normal business hours to prevent the movement of goods during the count. Failing that, you should suspend all transaction activities such as receiving and sales during the counting process
  • All items not to be counted should be segregated from the other stock (consignment goods, scrap, obsolete and damaged items)
  • Inventory tags should be used by the count teams to identify the items that have been counted. This is so that the teams can track where they have been and avoid double count errors.
  • Pre-numbered inventory sheets should be used to ensure that all items in the inventory system are counted.
  • Procedures should be put in place to control the movement of inventory during the count. Items received during the count should be kept separated from the rest of the stock so they can be sure to be added to the count. Items to be shipped out should be segregated from the rest of the stock so that they can be accounted for according to the company’s revenue recognition policy. Items to be transferred internally between locations should be segregated so that it can be confirmed that these are accounted for in only one location.
  • Discrepancies between the physical count and the book stock in the inventory system should be investigated by the supervisor.

If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.

Share this post

Related posts