physical inventory count

(noun)

Physical inventory is a process where a business physically counts its entire inventory. A physical inventory may be mandated by financial accounting rules or the tax regulations to place an accurate value on the inventory, or the business may need to count inventory so component parts or raw materials can be restocked. Businesses may use several different tactics to minimize the disruption caused by physical inventory.

Related Terms

Examples of physical inventory count in the following topics:

  • Internal Controls

    • Physical inventory counts are a way of ensuring that a company's inventory management system is accurate and as a check to make sure goods are not being lost or stolen.
    • A detailed physical count of a company's entire inventory is generally taken prior to the issuance of a company's balance sheet, to ensure that the company accurately report its inventory levels.
    • Cycle counts contrast with traditional physical inventory in that a full physical inventory may stop operation at a facility while all items are counted at one time.
    • Clerk conducting physical inventory count using a handheld computer in a Tesco Lotus supermarket in Sakon Nakhon, Thailand
    • Explain how a company would use storage, inventory management systems and inventory counts to control inventory

  • Perpetual vs. Periodic Counting

    • A company using the perpetual inventory system would have a book inventory that is exactly (within a small margin of error) the same as the physical (real) inventory.
    • Physical inventories are conducted at set time intervals; both cost of goods sold and the inventory are adjusted at the time of the physical inventory.
    • Perpetual inventory systems can still be vulnerable to errors due to overstatements (phantom inventory) or understatements (missing inventory) that occurs as a result of theft, breakage, scanning errors, or untracked inventory movements.
    • While the perpetual inventory method provides a close picture of the true inventory information, it is a good idea for companies using a perpetual inventory system to do a physical inventory periodically.
    • Physically counting inventory ensures that book value and physical value are the same.

  • Conducting a Physical Inventory

    • Physical inventory is a process where a business physically counts its entire inventory.
    • In addition, inventory control system software can speed the physical inventory process .
    • Cycle counting, an alternative to physical inventory, may be less disruptive.
    • The teams count the inventory items and record the results on an inventory-listing sheet.
    • When analyzing the results, a company must compare the inventory counts submitted by each team with the inventory count from the computer system.

  • Specific Identification Method

    • Specific identification is a method of finding out ending inventory cost that requires a detailed physical count.
    • Conceptually, the method matches the cost to the physical flow of the inventory and eliminates the emphasis on the timing of the cost determination.
    • The merchandise inventory figure used by accountants depends on the quantity of inventory items and the cost of the items.
    • It requires a detailed physical count, so that the company knows exactly how many of each goods brought on specific dates remained at year-end inventory.
    • Conceptually, the method matches the cost to the physical flow of the inventory and eliminates the emphasis on the timing of the cost determination.

  • Average Cost Method

    • To see how a company uses the weighted-average method to determine inventory costs using periodic inventory procedure, look at.
    • Assume that both Beginning Inventory and Beginning Inventory Cost are known.
    • Each time, purchase costs are added to Beginning Inventory Cost to get Cost of Current Inventory.
    • At the end of the year, the last Cost per Unit on Goods, along with a physical count, is used to determine ending inventory cost.
    • The Weighted-Average Method of inventory costing is a means of costing ending inventory using a weighted-average unit cost.

  • Nature of Inventory

    • An organization's inventory counts as a current asset on an organization's balance sheet because the organization can, in principle, turn it into cash by selling it.
    • Inventory may also cause significant tax expenses, depending on particular countries' laws regarding depreciation of inventory, as in the case of Thor Power Tool Company v.
    • This system requires a physical count of goods on hand at the end of a period.
    • Inventory cost includes all expenditures relating to inventory acquisition, preparation, and readiness for sale, minus purchase discounts.
    • Explain the purpose of inventory and how a company controls and reports it

  • Impact of Measurement Error

    • Inventory systems can be vulnerable to errors due to overstatements (phantom inventory) when the actual inventory is lower than the measurement or understatements (missing inventory) when the actual stocks are higher than the measurement.
    • It is quite easy to overlook goods on hand, count goods twice, or simply make mathematical mistakes.
    • Inventory controlling helps revenue and expenses be recognized.
    • A general rule is that overstatements of ending inventory cause overstatements of income, while understatements of ending inventory cause understatements of income.
    • Female clerk doing inventory work using a handheld computer in a Tesco Lotus supermarket in Sakon Nakhon, Thailand

  • Reporting Inventories

    • Companies must choose a method to track inventory.
    • The perpetual inventory system requires accounting records to show the amount of inventory on hand at all times.
    • In the periodic inventory system, sales are recorded as they occur but the inventory is not updated.
    • A physical inventory must be taken at the end of the year to determine the cost of goods.
    • Regardless of what inventory accounting system is used, it is good practice to perform a physical inventory at least once a year.

  • Methods in Retail Inventory

    • For some companies, taking a physical inventory is impossible or impractical so the Retail Inventory Method is used to estimate.
    • In certain business operations, taking a physical inventory is impossible or impractical.
    • The physical inventory is valued at retail, and it is multiplied by the cost ratio (or percentage) to determine the estimated cost of the ending inventory.
    • The advantage of this method is that companies can estimate ending inventory (at cost) without taking a physical inventory.
    • Because RIM only provides an approximation of inventory value, physical inventory must also be performed periodically to ensure the accuracy of inventory estimates due to issues such as shoplifting.

  • Gross Profit Method

    • An inventory valuation allows a company to provide a monetary value for items that make up their inventory.
    • In perpetual inventory the accounting records must show the amount of inventory on hand at all times.
    • While the best way to value inventory is to perform a physical inventory, in certain business operations, taking a physical inventory is impossible or impractical.
    • There are two methods to estimate inventory cost, the retail inventory method and the gross profit method.
    • Either of these methods should never be used as a substitute for performing an annual physical inventory.