Top 5 Year-End Closing Activities for Manufacturers

Posted on: December 10, 2020 | By: Ethan Naegele | QAD Financials, QAD Manufacturing, QAD Business Process, QAD Distribution

It is vital for any manufacturing organization to execute the year-end processes properly and on time. In this list, we’re going to cover five crucial aspects of financial year end activities—and how QAD can provide solutions.

1. Inventory Reconciliation

In order to ensure that a manufacturing organization has a successful year-end close, it must follow the typical process of inventory reconciliation, which we outline in the following steps:

  1. Count the products. This is generally done during employee overtime or during slow hours. The initial count should be derived from the perpetual inventory ledger. Provide a process to count inventory not on the perpetual ledger. Count tags will define Item, and Item location.
  2. Check the records—compare the inventory records with the items in stock. If items are non-serialized, compare them to supplier invoices, and be sure to check for any discrepancies.
  3. Visibly mark the records as counted to prevent double counting in the physical inventory process.
  4. Then, check for any possible causes of missing items. Causes may include either math error, a missing sales receipt, or possibly theft or supplier fraud.
    • We define shrinkage as (recorded inventory value – inventory value) ÷ (sales) x 100.
  5. Perform “Root Cause Analysis” for the discrepancies if possible, although note that sometimes, a cause may never be found.
  6. Reconcile inventory records to match the actual number of items present in the inventory.

In order to assist with the inventory reconciliation process of a business, QAD has a physical inventory module which businesses can utilize to significantly simplify the inventory reconciliation process.

For Work in Process (WIP) material, ensure that all open production orders at the count date reflect material issues to the production order and the latest value add operation.   The production order / WIP material valuation report should reflect an accurate value in process on the production floor.


2. Balance Sheet Reconciliation

The second critical aspect of a manufacturing organization’s year-end close is balance sheet account reconciliation. A well-practiced accounting department will do this monthly, but the year-end reconciliation is especially critical for an external audit.

All balance sheet accounts require a reconciliation of general ledger account ending balance to detail transactions that support that ending balance. These auditable documents will be provided to external auditors.

In order to streamline the reconciliation process, use account reconciliation software. Right now, is a popular package.

To assist in the balance sheet reconciliation process, organizations can utilize QAD’s consistency checks feature, which balances inventory, accounts payable, accounts receivable, and purchase order receipts to the sub-ledger balances. Balancing the other accounts on the balance sheet will require recon outside of QAD.


3. Audit preparation

Preparing for the yearly audit is another key aspect of a successful year-end close.

Here are two important preliminary steps manufacturers must take to begin audit preparation.

First, close the end of year financial numbers as tight as possible. This tight or hard close ensures that all accrual expenses and prepaid items are properly recorded.  Revenue or Sales are appropriately recorded in the proper period. Ensure all year-end journal entries are recorded.

Second, organizations should request a “Provided by Client” list if one has not already been received. This list allows the organization to prepare the required schedules before the auditors arrive. The schedules must agree to the year-end trial balance provided to the auditors.

Furthermore, in order to sufficiently prepare for an audit, organizations need to be familiar with the documents the auditor will need to complete the audit. Note that all companies may not have all such documents, but companies should be able to access the relevant data somehow.

The required records include but are not limited to:

  • Financial statements including balance sheet and income statement
  • Cumulative general ledger. Typically, this is an electronic file of all the year’s posted GL transactions.
  • Paid invoices
  • Checking account bank statements + monthly bank reconciliation and cancelled checks
  • Accounts receivable subsidiary ledger
  • Schedules for all balance sheet accounts

Organizations should also gather the following list of management records, which includes but is not limited to:

  • Contracts
  • Governing documents
  • Prior year audit and tax returns

Test of Controls

External audits are comprised of two main audit objectives – Test of Controls and Test of Balances. Stronger internal controls impact the timeline and efficiency of the test of balances audit. Therefore, manufacturing companies must ensure that they are sufficiently prepared for the test of controls audit.

Here is what happens during a test of controls audit.

The auditor will assess whether the controls will prevent or detect a misstatement in the financial statements. He will also assess if the control was applied consistently. He will also inspect documents or reports to prove that the control has been performed.

Note that the tests of controls can be classified into three general categories:

  • Observation: auditor observes a business process while it occurs, particularly the control elements used in the process.
  • Reperformance: auditor initiates a new transaction to examine the controls (and the effectiveness of them) used to handle the transaction.
  • Inspection: auditor examines business documents for the approval signatures, stamps, or review check marks used to signify that controls have been performed.

Here are a few steps companies can take to prepare for the test of controls audit.

  • Companies must ensure proper cutoffs of revenue and expenses. If a future period sale is backdated, then cutoff procedures are flawed and internal controls are compromised.
  • Companies must also ensure that the internal controls are SOX compliant.
  • Companies can also utilize the QAD Segregation of Duties module. This module helps enforce security and segregate duties that are in conflict and present risk because they compromise the internal control requirements.

The procure to pay cycle is the classic example of such duties.   Tasks included are:

Create Master Data

  • Suppliers’ addresses
  • Supplier Remit to address

Transactional process are:

  • Create PO
  • Complete receiving
  • Enter supplier invoice
  • Create payment for invoice
  • Reconcile the bank cash disbarment accounts

Each one of these tasks should be completed by unique individuals, else, external (outside the system, aka, mitigating) controls must be implemented. For instance, if the person entering the invoice and creating the payment is the same person, then the organization needs a mitigating control. Typically, this is a controller reviewing and signing off on the checks.

To learn more about how QAD EE can help with the segregation of duties, please click here to view a Segregation of Duties Webinar.


4. Tax Planning and Preparation

The fourth key year-end activity is to plan and prepare for taxes. Tax issues and government compliance will result in final income tax provisions recorded to the general ledger, payroll tax adjustments for the next operating year, and transactional tax compliance for Sales, Use or Value added taxes that require remittance and filings.

Professional tax services will provide a list of required supplementary schedules for the compilation the Federal Tax Form 1120 and all its required support documents.

Additionally, organizations must confirm that the year-end payroll expenses match up with their monthly payroll taxes in order to prepare for IRS Form 940. Payroll tax filings will ensure that a company has the correct payroll and payroll expenses in their records.

Note that failure to file quarterly payroll returns (Form 941) has stiff penalties. No extensions are offered for Form 941, and there is a 5% penalty for each month or partial month that the form is filed late, with a maximum penalty of 25%. Late deposits will incur a penalty between 2% and 15% of the unpaid tax, and there is a 0.5% additional tax for each month or partial month that the tax is paid late.

Companies should run a year-end report of taxable sales to confirm that all required sales taxes of the company have been paid, if applicable. (Sales tax filings are typically completed monthly or quarterly). If a company is outside the United States, the same rules apply to the VAT.

1099 filings are completed for the last fiscal year for un-incorporated service providers that have received amounts in excess of $600 per year. To assist with this, applicable providers should use the QAD 1099 module, built specifically for filing this form.

Companies should also be sure to reconcile federal income taxes paid and state taxes paid. Income taxes always require quarterly filing and payments of estimated income taxes.

One of the key details of expense activity organizations need to be sure to document is the details of asset purchases, which include the following:

  • Cost of asset, including sales tax if applicable
  • Description of asset
  • Date put into service
  • Amount of time the asset is used for the business (as opposed to personal use), as a percentage of total use.

Companies will have to determine if there are any section 179 write-off provisions for the current tax filing year. Section 179 tax law provisions encourage capital spending. In 2020, the limit to the total amount written off is $1,040,000. Most tangible goods that American businesses typically use qualify for the deduction. This includes off-the-shelf software and most business vehicles.

Depreciation schedules

Organizations may also need to determine the depreciation of company assets going forward. This will include:

  • Original cost of asset
  • Accumulated depreciation up to this tax year
  • Business use percentage (if applicable)
  • Recovery period of the asset (for example, 3 years, 5 years, etc.)
  • Any Section 179 expense or Bonus Depreciation taken in the first year of service

Fortunately, manufacturing companies can leverage the QAD Fixed Asset module, which is able to support most if not all of the requirements listed above.


5. Meeting the Employees’ Needs

One of the most important aspects of any manufacturing company’s year-end close is in ensuring that the company meets the needs of those within the organization. This will include taking several things into consideration:

  • Payroll rates may change on the first of the year.
  • Medical insurance programs may change on the first of the year
  • Annual performance appraisals will typically occur once per year
  • Profit sharing and 401k funding.

Lastly, organizations should reset next year’s payroll withholding rates. Payroll systems withholding rates will require updating based on employee exemptions and any changes in the tax code. These rates must be updated in payroll systems to ensure withholding on individual paychecks are calculated. This updating process typically occurs at the end of the year as well.

Next Steps

Understanding and implementing common practices for year-end close activities is no doubt vital for your business. To learn more about how QAD can help with your year-end close, please contact the QAD experts at Logan Consulting.

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