Question

1. How can we use the skills we acquire to ensure accurate inventory valuations in our businesses?
2. What are some of the ‘red flags’ in inventory that give us reason for further investigation?

Answer 1

Accurate inventory valuations can be ensured through the following ways:

1.Physical counting of the goods and periodic reviews

2. Have a unique numbering system for purchase and sales receipts

3. The principle of inventory accounting must be consistently applied from year to year

4. Have a cost system developed to account for inventory costs

5. Any decline in inventory value must be written off and also slow moving inventory must be disposed off

Some of the red flags are:

1. The cost of inventory reported in spite of the purchase and manufacturing cost being lesser.

2. The physical count of inventory does not tie with the accounting records.

3. There are some missing receipts or duplication of credit memos

4. There are excessive inventory adjustments

5. Any excessive reduction of inventory that does not match the sales level

6. There are frequent orders than usual for inventory purchase

7. There is no appropriate evidence for write off of inventory