Accuracy of the balance sheet: A reflection of economic reality
Accuracy of the balance sheet: A reflection of economic reality
A company’s economic reality can be measured through different means, including financial indicators. Among the most important indicators of an organization are fixed asset turnover and inventory turnover, which reflect how efficiently these accounts are being managed. It is therefore essential for a company’s management to ensure the proper identification and valuation of the assets recorded in such accounts, in order to support proper short- and long-term financial decisions.
Among the various control mechanisms available for businesses, conducting a physical inventory count allows a company to verify the existence of goods against its records. When combined with an assessment of the useful life and value of those assets, management will have the necessary elements to confirm – within one single process – that its assets not only exist but are also correctly valued.
Analyzing the results of such control procedures will allow the company to assess the effectiveness of its management system and the impact of the discrepancies identified on its results and indicators. This may open an internal debate: Since when do the identified stock differences or shortages exist? Are these differences the result of regular or bad practices in inventory management? What measures should the company take to mitigate the economic impact of inventory or valuation discrepancies?
While some level of inventory and valuation differences may be expected – whether due to historical indicators or common practices in the company’s line of business (e.g., production losses) – these differences must still be analyzed to determine their effect on the company’s economic reality, within a framework that enables the company to generate future benefits from the controls it implements.