Accounting Best Practices, Fifth Edition

Chapter 16. Inventory Best Practices^[1]

^[1] Selected best practices in this chapter are adapted with permission from Steven M. Bragg, Inventory Best Practices (Wiley, 2004).

This chapter describes a variety of best practices that are focused on improving the accuracy of the existing inventory, improving inventory transactions, and reducing a company’s investment in inventory. Though these improvements most directly assist other departments, such as the production, warehouse, and purchasing employees, the accounting staff is deeply interested as well. The reason is that the accuracy of the financial statements is largely driven by the accuracy of the inventory—if it is off by even a few percent, the variance flows through the cost of goods sold, resulting in a considerable amount of inaccuracy in reported profits. Even better, if the inventory investment can be reduced, the risk of incorrectly counting or valuing the inventory is also reduced.

The best practices shown in this chapter are different from those listed elsewhere in this book, in that the controller must obtain the approval and active participation of the warehouse, purchasing, and engineering managers for most of them. Without their help, such best practices as improving the bills of material, moving inventory to floor stock, and segregating customer-owned inventory will not be accomplished.

The remainder of this chapter consists of a review of implementation issues for inventory best practices, followed by a detailed ...