Finding slow-moving stock before the year-end count
How a manufacturer finds slow-moving and damaged stock before year end, and what to give its accountant so it can be valued below cost where needed.
By Achekam · · 4 min read · For Manufacturing businesses in South Africa, Nigeria, Kenya
Every factory has a corner of the warehouse nobody likes to talk about. It holds the pallet of a discontinued colour, the castings from a customer who cancelled, the cartons that got wet when the roof leaked two winters ago. The stock sheet still values all of it at what it cost to make.
At year end, that corner becomes an accounting question. The financial statements cannot carry stock at more than it can realistically be sold for, and the person who knows which items are dead is usually not the accountant. This article explains the rule, how to find the problem stock before the count rather than during it, and what to put in front of your accountant so the write-down is fair and supportable.
Why stock that will not sell at cost cannot stay at cost
Under IAS 2, inventories are measured at the lower of cost and net realisable value. IAS 2 defines net realisable value as the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.
ACCA puts the practical consequence plainly: because of that rule, damaged or slow-moving items may need to be written down, which increases cost of sales and reduces inventory. IAS 2 requires any write-down to net realisable value, and any loss of inventory, to be recognised as an expense in the period in which the write-down or loss occurs. Next year is too late.
Investopedia adds a warning worth taking seriously. It lists failing to write off obsolete inventory, and overvaluing closing inventory, among the ways cost of goods sold can be manipulated, and notes that inflated inventory understates cost of goods sold and inflates profit. A business that leaves dead stock at cost is, in effect, reporting profit it did not make. Investopedia suggests watching for inventory rising faster than revenue or total assets, which is often the first sign.
Finding the candidates
Do this a month or two before year end, not on count day. Three sources together catch most of it:
- Sales records. List every product with no sales, or very few, in the past year. Items that have not moved since the last count are the obvious first list.
- Count records. Compare last year's count sheets with this year's stock lists. Quantities that have not changed at all tell you the same story from the other side.
- A warehouse walk. Walk the stores with the production manager and the storekeeper. Look for damage, dust, faded packaging, rust, expired dates and anything that was made for a customer who no longer buys. Photograph what you find.
The walk matters most. Records show what has not sold; only eyes show what cannot be sold.
Estimating what each item will really fetch
For each candidate, work out net realisable value in the order IAS 2 describes it:
- Estimated selling price. What would a buyer pay in the ordinary course of business? For a discontinued line, that may be a clearance price to a dealer, not the old list price.
- Less costs to complete. Partly made items need further work before they can be sold; deduct that.
- Less costs to sell. Deduct whatever it will take to sell them: repacking, delivery, a dealer's extra discount.
If the result is below cost, the difference is the write-down. If the item cannot be sold at all, net realisable value may be nil, or only what a scrap merchant would pay.
Mind what "cost" means in your books
In Achekam, cost of sales uses the single cost price typed on each product, with no FIFO or weighted-average costing. Before comparing net realisable value with cost, check that the typed cost price is current; an out-of-date figure gives a wrong write-down in either direction. Working out finished goods cost covers how to arrive at a sound cost price.
The list your accountant needs
Give your accountant a single schedule, not a pile of notes:
| Column | What goes in it |
|---|---|
| Product and SKU | So each line can be traced to the stock records |
| Quantity on hand | From the count, not the system alone |
| Cost per unit and in total | From the product's cost price |
| Why it is a problem | Slow-moving, damaged, discontinued, expired |
| Estimated selling price | With the basis: a quote, a recent clearance sale, a scrap price |
| Costs to complete and sell | Estimated |
| Net realisable value | Selling price less those costs |
| Write-down | Cost less net realisable value, where positive |
| Evidence | Photographs, quotes, last sale date |
Have the production manager and the owner sign it. The accountant will challenge estimates; signed evidence makes that conversation short. Who should do the count itself is covered in who counts the stock.
Recording the agreed write-down
Here a limitation in Achekam matters. Stock counts, wastage, transfers and opening quantities do not post to the general ledger; only till sales and till returns move the inventory account. Adjusting a quantity in the stock records will therefore not change the inventory figure in your books.
The agreed write-down is recorded by manual journal instead: debit cost of sales, or a separate stock write-down account if your accountant prefers to show it on its own line, and credit inventory. Achekam refuses a journal that does not balance or that is dated in a closed month, so post it before the year-end month is closed. A posted journal is corrected only by reversing it, so if the accountant revises the figure, reverse and repost rather than editing.
For the retail side of the same problem, see stock write-offs in the books.
Before the count
The IFRS Foundation's summary of IAS 2 explains how cost is determined and why inventories are carried at the lower of cost and net realisable value. Book the warehouse walk now, build the schedule, and send it to your accountant before the count, not after it.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
