Accounting Best Practices, Fifth Edition

12–22. Use Cycle Counting to Avoid Month-End Counts

A common effort for companies with poor inventory record-keeping systems is to count the inventory at the end of every reporting period. By doing so, the controller is assured of a reasonably accurate cost of goods sold figure, though at the cost of shutting down the business while the counting process goes on (since this may interfere with accurate inventory counts), which not only runs the risk of losing some business, but also requires paying some employees to conduct the decidedly not value-added inventory counting activity. Over the course of a year, this represents either a major loss of revenue, addition to expenses, or both.

The solution is to stop taking periodic inventory counts. By doing so, there is no stoppage of sales activities, nor is there any need to redirect activities to counting inventory. In addition, the accounting staff no longer has to spend valuable time during the end of the month to participate in the inventory count, which gives them more time to complete the financial statements more quickly. Unfortunately, this happy state of affairs brings with it some risks. The main one is that inventory may become quite inaccurate over time, resulting in cost-of-goods-sold numbers in the financial statements that will, over time, depart quite a long way from the actual situation. If this number is inaccurate, ...