The financial year end is fast approaching and SMEs (small / medium enterprises) might have their compliance requirement to get year-end numbers audited / reviewed by a professional accountant which may either be part of fulfilling bank covenant conditions or for the tax purposes.
As owners, we are our best judge when it comes to value of inventories in the financials. Any error or anomaly in the inventory values at year end will have a direct impact on the performance and the financial position of the business for the year.
Owners of the business need to ensure that the assertions included below are considered and adhered to before a dollar value is assigned to the closing inventories.
Important criteria for a proper stock taking is to provide documentary evidence of proper set of procedures being followed with supporting work papers and hence the existence of stocks and their condition can be confirmed at a later date.
As owners of businesses, one must ensure that the following simple steps are followed to achieve an efficient and reliable stock take and thereby the above assertions are taken into consideration and properly adhered to:
• Issue written stocktaking instructions and brief staff involved.
• Assign a person to be in-charge of stocktaking who will be the main point of contact during and after the stock taking.
• Organise the stocks to facilitate complete and accurate counting.
• Ensure that no item is left out or counted more than once.
• Calibrate the instruments to be used for stock take such as weighing machines, counting devices or measuring gauges.
• Have adequate procedures in place to cover inventories not on the premises – outside warehouse, depots, third parties (consignment stocks)
• Identify third party stocks with the business for elimination.
• Identify slow moving, redundant or damaged item and note down for valuation adjustment.
• If practical “freeze” movements of all stocks during stocktaking to ensure proper cut-offs.
• As part of segregation of duties count stocks in the presence of a person who is independent of the person normally responsible for stock.
• Incorporate adequate supervision of the process and test check the counts by a third person.
• Investigate differences if any between stock sheets and main inventory records
• Authorise write off of such differences after analysing the causes and adjust the books
• Value the inventories preferably on First In First Out (FIFO) basis and make provision for slow moving, redundant and obsolete stocks
With an efficient inventory checking and proper valuation the owners of the business can be rest assured of the final inventory number that goes into the financial statements are correct and thereby the results for the year and financial position at year end can be relied upon not only by the business owners by also by compliance authorities.
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