Accounting Best Practices, Fifth Edition

16–16. Compare Recorded Inventory Activity to On-Hand Inventories

Some industries deal with extremely expensive materials. In these situations, it is critical to ensure that recorded inventory levels are completely accurate, since even a small quantity variance can lead to a large impact on profitability. This is a particular concern when dealing with precious metals or gemstones, not to mention a variety of electronic components.

Many of the other best practices noted in this chapter will help to keep inventory accuracy within reasonable limits, such as auditing inventory transactions or cycle counting; but to be absolutely sure that quantities are correct, the best way is to compare recorded inventory activity to on-hand inventories. This approach varies from auditing because it assumes a 100 percent review of all transactions for selected items. Because it is a highly labor-intensive approach, one must confine it to a minimum number of especially expensive or critical inventory items.

To use this method, conduct a daily comparison of on-hand quantities to every transaction associated with them, such as receipts, inventory moves, scrap, production, returns from the production floor, and shipments. Of particular interest during this review process is any transaction that is not made, is made twice, is made in the wrong amount or on the wrong date, or involves the wrong part number ...