Closely monitoring changes to inventory is often harder than it looks, but it is one of the key components of retail financials. To certify the accuracy of financial reports, retail staff must calculate net income. There are two reasons measuring inventory value is complicated:
- Inventory is in a state of constant change as items are sold, purchased, returned and transferred.
- Inventory values tend to distort over time.
Auditing inventory ensures that the record of goods purchased (on the vendor’s invoice) matches the record of the cost of goods received (on the receiving vouchers), thus eliminating the primary source of inventory valuation problems.
Discrepancies in inventory valuation have four common sources:
- Items being sold before they are received
- Incorrect cost information
- Data input errors
- Documents processed out of sequence
Each of these creates a temporary inaccurate statement of costs that can affect inventory valuations and sales margins for the period, until the vouchers are finally updated with correct cost information. Since inventory values are entered on financial reports as a lump sum, even minor discrepancies on individual items can greatly skew the total inventory value when those items are added together.
A physical inventory at the end of the period can provide an accurate picture of quantities at that time, but it does not guarantee that the cost values are always accurate, as a stock audit does. Also, performing a physical inventory at high frequencies can be expensive and time-consuming.
Read the full whitepaper “Retailers’ guide to financials: how to comply and thrive” to find out more about other components of successful retail financials.