This purpose of this procedure is to provide guidance for [enter-your-company-name-here] and its subsidiaries regarding the need to take regular physical inventories of the Company’s raw material, work in process, finished goods, and stores inventories.
[enter-your-company-name-here] uses various types of inventory in the course of its business. Maintaining adequate controls over inventory is important to ensure proper balance sheet valuation and recognition of cost of products sold.
Additionally, a physical inventory provides the Company with an opportunity to maintain the accuracy of its perpetual inventory records
This procedure assures that one un-audited semi-annual and one audited annual physical inventory should be taken of raw materials, work in process, and finished goods.
Procedures should ensure that all physical inventory results are summarised, discrepancies are investigated, and necessary adjustments are recorded to adjust the balances on the Company’s records to reflect the results of the physical inventory.
Cycle counts or other periodic verifications can be used in place of an inventory, as long as they provide for the counting of all groups of inventory at least once during the year. In the event a business elects to utilise cyclical counts in lieu of a complete inventory, the business is required to request and receive approval from the Accountant.
The taking of a physical inventory must be properly supervised and controlled by the Accounting department.
At least one physical inventory should be taken in close proximity to year-end and coordinated with the independent external auditors’ mutual agreement.
Accounts covered by this procedure include Raw Materials, Work in Process, Finished Goods, and Stores Inventory.
The following procedures are intended to assist the business in applying this procedure. The procedures are not intended to address specific control activities applied by the business or statements of operating procedures.
The intent is to provide supporting guidelines to assist operating units in developing necessary activities to ensure that the procedure is understood and being followed.
ANNUAL PHYSICAL INVENTORIES
The physical inventory should be supervised and controlled by members of the business, Accounting and Operations management teams.
Normal operations may need to be significantly or temporarily suspended.
Instructions to participants, who are involved in the physical inventory process, should be in writing and include:
- Location, date, and start time.
- Team designation and rolls of key team members.
- Assignment of teams to specific areas.
- Detailed instructions including examples on how to complete the recording of the physical counts.
- Guidance on how to designate suspect inventory for later review as to obsolescence, damage, or scrap.
- Identification of inventory designated as customer property awaiting shipping instructions (in cases in which the inventory is physically segregated).
Inventory should be maintained in a manner that facilitates physical counting and should be conducted by personnel who are familiar with the inventory being counted.
In cases in which a second team recounts inventory, the recount should be promptly reconciled to the initial count and all differences reconciled.
All sheets or tags used during the physical count should be accumulated and accounted for before completion of the inventory of a specific area. A process, such as sequential numbering, should be utilised to assure all physical inventory documents are accounted for.
PERIODIC PHYSICAL INVENTORIES – CYCLE COUNTS (STORE ROOM)
Periodic counts must cover all inventories at least once during the year. They may be more frequent at the discretion of the business Controller.
Perpetual inventory records must be up to date.
INVENTORY NOT ON COMPANY PREMISES
In cases in which Company owned inventory is in transit or otherwise not in the Company’s physical possession it should be verified through the use of existing records that can be reviewed and used to authenticate its existence either through physical measurement at a later date or through some other independent source.
This alternative independent source includes comparing perpetual inventory records received from the company storing the inventory to the business’s own perpetual records.
PROPER IDENTIFICATION OF INVENTORY OWNERSHIP
If practical, all inventory that is being held for customers should be clearly identified in the inventory records and physically segregated.
In cases in which customer owned inventory is co-mingled with Company owned inventory, the physical inventory should count all product on-site.
As part of the reconciliation process, the count should be compared to the total quantities in the perpetual records, thus validating Company owned and Customer owned perpetual quantities as a common group of product.
RECONCILIATION OF PHYSICAL AND PERPETUAL RECORDS
The physical inventory quantities should be reconciled promptly with the perpetual records. A recap of differences should be developed showing the inventory item, the amount on the perpetual records, the amount counted, the unit difference, and the dollar value of the difference.
The perpetual inventory records should be adjusted for significant variances as compared to the physical quantities counted.
All differences are investigated.
Items that were identified as questionable value should be reviewed and adjusted to reflect their realisable value.
The Accountant should be advised of differences that result in adjustments to the inventory values on the business’s books.
APPLICABLE EXTERNAL GUIDANCE
The need to take physical inventories on a regular basis is based on sound business sense and the need to assure that assets reported on a company’s balance sheet are supported by the existence and control of those assets by the Company.
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