Inventory analysis is a set of accounting activities aimed at preparing a detailed inventory of property components and their sources of origin on a specific date. The inventory consists of determining the actual state of all tangible and monetary assets using a census, as well as explaining the differences between the state found during the actual census (the actual state) and the state resulting from the accounting records. In other words, inventory analysis is a set of activities that aim to determine the real state of the company's fixed and current assets, as well as liabilities for a given moment (C. Burja, N.M. Lesconi-Frumuşanu, 2010, pp.5-6).
These differences are mainly due to the following two reasons (C. Burja, N.M. Lesconi-Frumuşanu, 2010, pp.5-6):
- changes in the natural characteristics of objects, which cannot be determined based on evidence (evaporation, drying, inaccurate measurement of the acceptance and release of bulk materials, inventory obsolescence, fashion changes, etc.)
- errors and abuses committed by employees in accounting records (numerical errors in documentation and records), mistakes in accepting and releasing tangible assets, thefts, and fraud.
Types of inventory analysis
A distinction is made between the following types of inventory analysis (D. Ivanov, et al., 2017, p. 78-85 ):
- physical inventory - made by the members of the inventory committee on the basis of direct observations and measurements of assets in the economic unit. Includes observable fixed assets, tangible current assets, cash in hand, securities. Inventory analysis taking by means of a physical inventory includes also assets owned by other entities, entrusted to the entity for sale, safekeeping, processing or use, notifying these entities of the results of the inventory. This obligation does not apply to entities providing postal, transport, forwarding and storage services.
- reconciliation of balances with counterparties - includes the balance of cash on bank accounts, loans, and credits, receivables, liabilities.
- verification of the recording status - refers to assets and liabilities whose status cannot be determined by inventory taking or reconciliation of balances with counterparties. This applies in particular to agricultural land, receivables, and public and legal liabilities and other components that are impossible to see.
- systematic - it is repeated periodically or conducted continuously in a continuous system
- cyclical - is one of the types of systematic inventory, which is characterized by a constant frequency of repetition (e.g. every 2 years, every quarter)
- occasional - it appears suddenly and is caused by some reason (e.g. flood), but also on the occasion of a special check-up or closure of the facility
- ad hoc - unannounced
- full - includes both foreign and own assets
- partial - includes only some assets
- settlement - clears accounts of persons who are materially responsible for the entrusted property
- estimated - is used to assess the approximate state of assets, it is intended to provide an indication of the state of assets in a short period of time
- control - is performed for purely control and verification purposes and is commissioned by external bodies or bodies constituting companies
- review - consists of a physical inventory to review stocks for a specific purpose
- annual - used to determine taxable income or to make the balance sheet and financial result more realistic
- quarterly - used in some entities to determine taxable income
- extraordinary - is performed at the request or request of external bodies, or in the event of closure of the company
- continuous - is carried out in larger warehouses or warehouses, where tangible assets are accounted for quantitatively or quantitatively - value, this method sometimes takes longer time due to the writing down of the total number of all assets, sometimes it takes even a whole year.
Objectives of inventory analysis
We distinguish between the following inventory objectives (K. Biswa, 2017, pp. 12-14):
- bringing the record state in line with the actual state,
- ensuring the reliability of the accounts and the reliability of the financial statements,
- settlement of persons responsible for the property of the entity,
- counteracting irregularities in the economy of the entity's assets.
Due to the diversity of public finance sector units, an important role is played by an appropriate division of tasks and responsibilities within the scope of inventory between organizational units and delegation of rights to individual employees. The quality of the inventory, and thus the quality of financial statements, depends directly on the results of their work. Annual financial statements cannot be considered reliable if they are prepared based on data from accounting books not confirmed by inventory analysis (K. Biswa, 2017, pp. 12-14).
Assumptions for inventory analysis
Following the regulations in force, the inventory concerns the following activities (A.Rahim, 2018, p.156-160):
- carrying out a physical inventory of all the assets at the disposal of the business entity,
- valuation of the value of written-off components,
- obtaining from business entity's business partners written information on the balance of its cash on bank accounts, on bank credits, receivables and liabilities, as well as on the balance of own assets entrusted to business entities,
- comparison of cadastral data of some components with relevant documents, e.g. the condition of owned land,
- establishing and quantifying the causes of shortages and injury,
- making and motivating applications for the method of settling inventory differences,
- indicate ways to eliminate irregularities in the economy with the assets of the entity.
Inventory analysis methods and techniques
There are three methods of inventorying (C.M. Adams, 2004, pp. 12-15):
- by physical inventory taking, valuation of the quantities written off, comparison of value with bookkeeping data and explanation and settlement of any differences
- by receiving from banks and obtaining from counterparties confirmations of the correctness of the balance of these assets disclosed in the books of accounts and by explaining and settling possible differences
- by comparing the data of accounting books with relevant documents and verifying the value of these components.
The inventory may be carried out manually or using IT tools supported by electronic equipment. Identification of individual elements of property by automatic method uses marking and reading using barcodes and RFID tags. Data identified by readers and collectors are processed by software cooperating with databases.
Tools supporting automatic inventory (C.M. Adams, 2004, pp. 12-15):
- Adams C.M., (2004), Inventory optimization techniques, system vs. item level inventory analysis, "Conference: Reliability and Maintainability", 2004 Annual Symposium – RAMS, 12-15
- Biswa S.K., (2017), Analysis of Different Inventory Control Techniques: A Case Study in a Retail Shop, 12-14
- Broihahn M.A, Henry E., Pirie W.L, Robinson T.R, (2015), International Financial Statement Analysis
- Burja C., Lesconi-Frumuşanu N.M., (2010),Analysis Model For Inventory Management, 5-6
- Ivanov D., Tsipoulanidis A., Schönberger J., (2017), Inventory Management, 78-85
- Rahim A., (2018), A case study of inventory analysis in a healthcare product manufacturing company, 156-160
- Vrat P., (2014), Materials Management: An Integrated Systems Approach
- Wensing T., (2011), Periodic Review Inventory Systems: Performance Analysis and Optimization of Inventory Systems within Supply Chains
Author: Dominika Pasek