COGS-Exceeds Sales?

[zeros]

Client has a new business and ordered inventory to use in producing a product (jewelry). Well, the 1st year, she didn't sell a whole lot and still has a lot of the supplies left. Can this be charged off and ending inventory not considered or does the inventory have to be subtracted out?

[RitaB]

Inventory or Materials?

Client has a new business and ordered inventory to use in producing a product (jewelry). Well, the 1st year, she didn't sell a whole lot and still has a lot of the supplies left. Can this be charged off and ending inventory not considered or does the inventory have to be subtracted out?

Inventory is different than materials used to produce a product. Inventory would be items purchased for resale, and it's, well, it's inventory.

If she is purchasing supplies to make a product, you could write it off as an expense, I suppose, as in keep it off COGS, cause, obviously it's inaccurate to say it's COGS when the goods weren't sold. And, you need to anticipate some things here, like her going out of business and then making herself a bunch of jewelry out of her tax deduction.

I guess what I'm saying is: Don't do it, man. Put it on COGS, and figure out an ending inventory figure.

[Gretel]

Client has a new business and ordered inventory to use in producing a product (jewelry). Well, the 1st year, she didn't sell a whole lot and still has a lot of the supplies left. Can this be charged off and ending inventory not considered or does the inventory have to be subtracted out?

No. Inventory needs to be counted at the end of the year. Same for materials and supplies used to make jewelry. The total year-end inventory will be the sum of both. Actually you can have three categories: Finished products, unfinished products and materials/supplies.

Just got a new client with jewelry making/resale myself. We had quite some problems around this subject and I still don't know if she actually did a physical count. It is required and we have to ask for this. She developed are great system in Excel but did not well understand the concept.

[JohnH]

Accounting for inventory, especially ending inventory, can be very confusing to clients. They have paid out money for something and they believe they have a "write-off", when in fact they haven't really incurred an expense at all - they have just swapped the asset "Cash" for the asset "Inventory".

I've actually had some success in explaining it that way to get some clients to understand it. The transaction is just a swap on the balance sheet (cash asset converted to inventory asset). Inventory just sits in a different asset bucket until the inventory asset is expensed as a part of a sale transaction, and THEN it gets to run through the P&L. (Well, I think I've had success explaining it this way - they always nod in approval while I'm gabbing away).

We simplify the process by using beginning inventory plus purchases minus ending inventory to arrive at COGS, but in fact every transaction involving an exchange of inventory technically goes through this asset exchange process.

[Gretel]

John, I really like this explanation. Sounds so simple that way.

[ChEAr$]

The simplest way to explain it I think, is to tell client that since ending inventory hasn't been sold yet, it's "unfair" to take a deduction for it.

[Burke]

COGS Exceeding Sales???

Another possibility is that the client is valuing inventory at retail, not cost.