Accountants report inventory damages in the "cash flows from operating activities" section of a statement of cash flows, also known as a liquidity report or cash flow statement. Merchandise deterioration may come from adverse operating events as varied as fire, bad weather, a shipping process gone awry and goods' decay.
To record inventory damage, a corporate bookkeeper debits the merchandise damage account -- part of the "unusual losses" master account -- and credits the inventory account. The bookkeeper, in effect, writes off the damaged inventory's worth, and this constitutes a loss for the company. Merchandise write-off reduces an organization's net income and goes into a statement of profit and loss, also referred to as an income statement or P&L.
Reporting Inventory Damage
Financial managers report inventory damage losses in operating cash flows, which is the other name for cash flows from operating activities. They add merchandise losses back to net income when calculating operating cash flows, because the business incurred the expense but didn't dole out cash for it in the first place. This accounting treatment -- that is, adding non-cash charges back to operating cash -- is important to guide corporate leadership in liquidity management. Other non-cash expenses include depletion, amortization and depreciation. Liquidity management consists of tools, strategies and approaches a business relies on to make money, keep it, invest it and run a solvent operation -- meaning, one that produces more assets than debts at the end of a given period.
Keeping Tabs on Personnel
Department heads keep tabs on personnel for many reasons. These include reducing the risk of inventory damage, ensuring an environment where employees rein in waste, and figuring out the best way to instill in subordinates the notions of sound financial reporting and inventory management. Top leadership may work with segment chiefs to set procedures for cash-flow reporting, inventory monitoring and expense management. Personnel working in inventory management and financial reporting include warehouse managers, production foremen, accountants, financial managers and budget supervisors.
When a company takes inventory accounts off its books, the transaction doesn't affect only the liquidity report. The loss flows through a statement of profit and loss, thus reducing net income and retained earnings, which is integral to a statement of changes in shareholders' equity. Retained earnings represent profits a company hasn't distributed over the years. Inventory is a short-term asset, so a merchandise write-down produces a numerical dent in an organization's balance sheet.
Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.