Chapter 2 – Fiscal Management

22030.11.8.1 Physical Inventory Check List

• The following is a checklist of action steps that shall help to achieve a successful physical inventory:

  • Establish a firm inventory date, and provide advance notice to vendors and employees. The inventory date shall be established and approved well in advance of the proposed inventory. Cut-off times shall be determined for all operating activities which have an effect on physical inventory. This shall include interagency shipments and corresponding paperwork, issues, and vendor shipments and receipts. Determination of an inventory date shall depend on the number of items in stock, the time needed to count these items, and the established business hours. It may be beneficial to take the inventory during non-business hours to minimize disruptions to day-to-day operations. When the inventory is not centrally located, the physical inventory shall be conducted at all locations on the same day(s).

  • Assign inventory responsibilities. The supervisory responsibility for physical inventory shall be delegated to the person with the functional duties of purchasing officer, business manager, materials manager, or inventory manager. The accounting office shall fully participate in the physical inventory if the accounting office performs the inventory reconciliation.

• An inventory supervisor shall be assigned to each area to be counted to supervise the taking and reporting of the count. The functions of the inventory supervisor are:

  • Briefing. On the first day of the count, the inventory supervisor shall give the final briefing on count procedures.

  • Count control. The inventory supervisor shall maintain control of the preprinted inventory worksheets and assign worksheets for counting, supervise reconciliations, and collect the completed data.

  • Count integrity. The inventory supervisor shall maintain counting procedures, reconciliation of count data, and all other matters which affect count accuracy.

  • Inventory acceptance. The inventory supervisor has sole and final authority to accept count data as complete and accurate. The inventory supervisor may require recounting by staff, emergency overtime, etc. The inventory count is not completed until accepted by the inventory supervisor.

  • Perform inventory preparation. Before the scheduled inventory date, the warehouse manager(s) shall check all bins and bulk stock to see that the stock is clearly marked and arranged for ease of counting. All bin, shelving, and pallet rack labels shall be checked to assure that stock numbers, descriptions, and units of measure are identical to those listed on the inventory worksheets. The inventory worksheets are either computer produced or manually prepared by the inventory supervisor from the authorized stock listing (listing of items acceptable for storage). Items found in storage that are not shown on the stock listing shall be brought to the inventory supervisor’s attention for addition to the listing or disposal action.

  • Assign operating cut-off dates. Operating cut-off times for business activities and paperwork, and desired inventory preparation, shall be coordinated with the inventory date. All receiving documentation, requisitions, and shipping memos issued prior to the inventory shall be clearly marked “before inventory” and processed before the inventory is taken. All materials received after the assigned cut-off date shall be set aside, clearly identified as “after inventory,” and held until after the inventory counting is completed. All receiving and issuing documentation shall also be marked “after inventory” and not processed.

  • Determine and schedule inventory requirements for staffing, supplies, and equipment. Staffing heads the list of inventory needs. An adequate number of people shall be assigned. The types of listings, inventory tags, forms, or recording devices shall be selected. Writing tools, such as pencils, marking pens, etc., shall be provided. Masking tape, cards, wire, or string shall be obtained if tags are used. A clipboard or something similar shall be handed out to write on.

• Ladders and step stools shall be obtained ahead of time for easier counting of material on upper shelves. Equipment shall be available for stock that has to be moved during counting.

  • Provide adequate training. Schedule inventory training dates and provide advance notification to affected personnel. Conduct thorough training with inventory supervisors before instructing other inventory personnel (counters, recorders, inspectors, auditors, etc.).

• Inventory supervisors shall receive instruction a minimum of one week prior to inventory, to allow time to familiarize themselves with their area of responsibility and to make the area ready for inventory. Inventory personnel shall receive their instruction as close to the actual inventory as possible.

• Inventory training for counting personnel shall include information on why the inventory is necessary, how to count and record accurately, and how to identify materials that shall be inventoried. They shall also be informed that discovery of repeated bad counts through the audit process shall result in personnel recounting their entire area.

• An instruction booklet or inventory information sheet shall be printed and handed out to each person. The booklet or sheet might contain the purpose of the inventory, but shall illustrate and explain the method of taking inventory, reiterate certain key inventory steps to follow, list assignments and accountability, and point out certain dos and don’ts relating to inventory counting such as:

  • Do express count by the unit of measure assigned to the item being counted.

  • Don’t count partial quantities of any item where the quantity would be less than an expressed unit of measure, such as pounds, feet, or gallons.

  • Do individually count the contents of all opened packages.

  • Don’t open sealed packages to count. Use the count marked on the outside.

  • Do approximate the length of bulk items such as hoses, wire, etc., where lengths are extensive and too costly to count.

  • Don’t sight-count open – carton merchandise. Take merchandise out of containers to count.

  • Do replace boxes or packages (or items counted) back in original location after counting.

  • Don’t disturb rotation sequence of items counted that carry assigned shelf life (Add any dos and don’ts not shown above which fit the inventory being taken and delete those that have no relationship).

  • Count the inventory. The taking of a physical inventory shall be done in teams. A count team shall include a counter and recorder. As much as possible, members of count teams shall continue to work together throughout the inventory. Counting assignments shall be designated by a clearly defined physical area of the warehouse. The count teams shall count all stock within their area. The counter shall post a tag or card on all items counted to distinguish between counted and uncounted items. To make sure the correct item is being counted, the recorder shall read the complete stock item number, description, size, and color. The counter shall repeat the stock item number. Each recorder shall use a ruler as a line guide to ensure the count is entered in the proper column. The recorder shall record all numbers as neatly and legibly as possible.

• The count teams shall pay close attention to the unit of measure to ensure they are counting the correct unit of issue shown on the inventory worksheet.

• When an inventory item is not listed on the inventory worksheet, the item description, count, unit of measure, and stock item number shall be written in on the last page. All such write-ins shall be brought to the attention of the inventory supervisor.

• Filling of emergency orders during the inventory period shall be strongly discouraged. Requesters shall be asked to leave the order for filling and pickup after the inventory is completed. If the emergency is such that the order must be filled, the inventory supervisor has sole authority to approve this action.

  • Verify the count. The inventory supervisor shall assign count teams to check counts at random as well as to check on predetermined items which typically have been a counting problem in the past, have a high unit cost, or are subject to shrinkage. These counts shall be taken on approximately five percent of the stock. The person making the random counts shall record the stock item number, description, unit of measure, and quantity by area of recounted stock. The inventory supervisor shall reconcile this data to the original count; and if there is a difference, another count team shall be assigned to recount the item. If any evidence of a significant count error is detected, the original count team shall be assigned to recount all items within its assigned area.

• The audit taken during physical inventory shall ensure that all items are counted uniformly and that an accurate count is taken.

  • Perform inventory reconciliation. A report shall be issued at the conclusion of the physical inventory count which includes an explanation of any large differences between the inventory records and the physical count. Reconciliations may be required as a result of material issued from stock but not yet recorded or invoiced, materials-in-process, material on display or in separate areas, material missed during the count, or returned material and material-in-transit. The report shall contain an explanation of all attempts made to reconcile count and book differences. The book balance is the balance on hand shown on the Stock Control Record or stock status report at the inventory cut-off date.

  • Finalize the inventory. To obtain the monetary value of the inventory, the inventory items shall be priced out. Use either the average cost method or current replacement cost, whichever is lower. When the average cost method is used, the average cost shall be updated as new receipts occur, or on a periodic basis. The use of the current replacement price generally inflates the inventory value. When required, purchase, MINMinimum/MAX, or days-of-supply level and issue information shall be posted to the inventory worksheets. This information shall be used in the calculation of turn-rates and for readjustments of stock levels.

  • Prepare and submit the final physical inventory report. Prepare a copy of the inventory procedure, the final inventory monetary value, and the final physical inventory report. The report also shall contain the percentage of variance between the count and book inventories. The maximum acceptable percentage of variance is 5 percent. Generally, the difference after reconciliation shall be from 1 to 3 percent.

• Upon acceptance of the final inventory report by management, inventory records shall be changed to reflect actual on-hand balances as verified by the physical count. Units with manual systems shall indicate on the records what adjustments were made as a result of the inventory.

• Common reasons for inventory discrepancies are:

  • Lack of recording receipts or issues.

  • Accidentally placing merchandise in wrong storage areas.

  • Recording quantity received without checking actual count before stocking.

  • Pulling a larger quantity than asked for.

  • Failure to prepare needed paperwork.

  • Pilferage.

• Only a physical inventory, taken with proper audit control, can certify counts and recommend needed corrections in procedures, record keeping, or security.