how does inventory effect COGS?

Discussion in 'Accounting' started by RB, Jul 4, 2004.

1. RBGuest

In the retail sales business, how does inventory effect cost of goods sold?
I guess any losses found from physical inventory become an expense and that
increases the cost of goods sold, maybe.

RB, Jul 4, 2004

2. Wayne BraschGuest

"RB" <> wrote in message
news:fMUFc.6543\$...
> In the retail sales business, how does inventory effect cost of goods

sold?
> I guess any losses found from physical inventory become an expense and

that
> increases the cost of goods sold, maybe.
>
>

Cost of Goods Sold is inventory that is no longer with the company.

Wayne Brasch, CPA, M. S. Taxation

Wayne Brasch, Jul 4, 2004

3. RBGuest

Ummmm---a little obscure for my newbie level.

To clarify, let's take the typical P & L statement. What factors/elements
go into calculating COG?

RB, Jul 4, 2004
4. Wayne BraschGuest

"RB" <> wrote in message
news:J3XFc.16582\$...
> Ummmm---a little obscure for my newbie level.
>
> To clarify, let's take the typical P & L statement. What factors/elements
> go into calculating COG?
>
>

COGS is calculated by taking inventory at the beginning of the period and
adding purchases of merchandise during the period. You then get merchandise
available for sale. From that you subtract the inventory at the end of the
period. What you have then is COGS for the period. This represents the
cost of inventory sold during the period, hence COGS. There may be other
things to be included in this calculation, but let's just keep it simple at
the moment.

Wayne Brasch, CPA, M. S. Taxation

Wayne Brasch, Jul 4, 2004
5. _Guest

If you ask very vague questions you are quite likely to get equally
vague answers which, as an admitted newbie, may seem obscure to you.

Your clarification isn't much help.
Why don't you try to be very explicit, including some context or
background. What are you really trying to do, and why?

"RB" <> wrote in message
news:J3XFc.16582\$...
> Ummmm---a little obscure for my newbie level.
>
> To clarify, let's take the typical P & L statement. What

factors/elements
> go into calculating COG?
>
>

_, Jul 4, 2004
6. Wayne BraschGuest

"_" <> wrote in message
news:hLXFc.2608\$...
> If you ask very vague questions you are quite likely to get equally
> vague answers which, as an admitted newbie, may seem obscure to you.
>
> Your clarification isn't much help.
> Why don't you try to be very explicit, including some context or
> background. What are you really trying to do, and why?
>
>
> "RB" <> wrote in message
> news:J3XFc.16582\$...
> > Ummmm---a little obscure for my newbie level.
> >
> > To clarify, let's take the typical P & L statement. What

> factors/elements
> > go into calculating COG?
> >
> >

>
>

It appears to me that RB, the original poster is trying to learn and may be
a litle confused about accounting terminology. Do accountants in Canada,
where you are, calculate COGS in a manner different from what I described?

Wayne Brasch, CPA, M. S. Taxation

Wayne Brasch, Jul 4, 2004
7. S.M. SerbaGuest

Not in Ontario we don't.

--
Stephanie Serba, AICIA
Partner, Durham Business Outsource
Accounting & Technology
www.dbo.ca

"Wayne Brasch" <> wrote in message
news:...
>
> "_" <> wrote in message
> news:hLXFc.2608\$...
> > If you ask very vague questions you are quite likely to get equally
> > vague answers which, as an admitted newbie, may seem obscure to you.
> >
> > Your clarification isn't much help.
> > Why don't you try to be very explicit, including some context or
> > background. What are you really trying to do, and why?
> >
> >
> > "RB" <> wrote in message
> > news:J3XFc.16582\$...
> > > Ummmm---a little obscure for my newbie level.
> > >
> > > To clarify, let's take the typical P & L statement. What

> > factors/elements
> > > go into calculating COG?
> > >
> > >

> >
> >

>
> It appears to me that RB, the original poster is trying to learn and may

be
> a litle confused about accounting terminology. Do accountants in Canada,
> where you are, calculate COGS in a manner different from what I described?
>
> Wayne Brasch, CPA, M. S. Taxation
>
>

S.M. Serba, Jul 5, 2004
8. BeverlyGuest

On Sun, 4 Jul 2004 12:27:23 -0500, "RB" <>
wrote:

>Ummmm---a little obscure for my newbie level.
>
>To clarify, let's take the typical P & L statement. What factors/elements
>go into calculating COG?
>

In its simplest terms:

You purchase an item for \$1.00
You sell it for \$2.00

Your sales figure would be \$2.00
Your cost of goods sold would be \$1.00
Your gross margin would be the difference... \$1.00

COGS it what the items you sold cost you to buy.

It can be more complex:

The cost to AQUIRE the item for \$1.00, such as freight in, would also
be a cost of goods sold (called "landed costs" later); hence

You purchase an item for \$1.00
You paid \$0.05 in freight to get the item to you.
You sell it for \$2.00

Your sales figure would be \$2.00
Your cost of goods sold would be \$1.05
Your gross margin would be the difference... \$0.95

GENERALLY, cost of goods sold is not arrived at per item. The method
of calculating COGS (using the one item in the illustration, but is
done as a whole with all items) is:

Beginning inventory \$0.00
plus Purchases (including landed costs) \$1.05
less Ending inventory \$0.00
equals COGS \$0.95

NOTE: If you are a manufacturer, purchasing materials to transform
into something else, THEN selling them, it becomes even more complex.

Beverly, Jul 5, 2004
9. _Guest

> > "RB" <> wrote in message
> > news:J3XFc.16582\$...
> > > Ummmm---a little obscure for my newbie level.
> > >

> >

> "Wayne Brasch" <> wrote
> It appears to me that RB, the original poster is trying to learn and

may be
> a litle confused about accounting terminology. Do accountants in

> where you are, calculate COGS in a manner different from what I

described?

No, but as you said yourself, "There may be other things to be
included in this calculation, but....."

He MIGHT be asking about the basic periodic inventory calculation.
Or he MIGHT be asking about the retail inventory accounting method.
Or he MIGHT be asking about duty and freight-in.

He MIGHT be asking out of general interest.
He MIGHT be asking because he's taking a course.

Because there have been more than a few books written about inventory
and COGS, I thought it might be helpful to RB (and to those like
yourself who want to help) to narrow the scope of the question.

_, Jul 5, 2004
10. Wolfgang RochowGuest

"Wayne Brasch" <> wrote in message
news:...
>
> "_" <> wrote in message
> news:hLXFc.2608\$...
> > If you ask very vague questions you are quite likely to get equally
> > vague answers which, as an admitted newbie, may seem obscure to you.
> >
> > Your clarification isn't much help.
> > Why don't you try to be very explicit, including some context or
> > background. What are you really trying to do, and why?
> >
> >
> > "RB" <> wrote in message
> > news:J3XFc.16582\$...
> > > Ummmm---a little obscure for my newbie level.
> > >
> > > To clarify, let's take the typical P & L statement. What

> > factors/elements
> > > go into calculating COG?
> > >
> > >

> >
> >

>
> It appears to me that RB, the original poster is trying to learn and may

be
> a litle confused about accounting terminology. Do accountants in Canada,
> where you are, calculate COGS in a manner different from what I described?
>
> Wayne Brasch, CPA, M. S. Taxation
>
>

I do believe that the general ground has been covered well. However, there
are variations.

Inventory valuation impacts the COGS. For example Wayne suggested a P&L
Statement presentation of
Opening Inventory + Purchases - Ending Inventory = Cost of Goods Sold (COGS)
However, COGS sold will come out differently e.g. under LIFO and FIFO
inventory calculations, assuming that acquisition costs fluctuate.

In a serialized inventory situation e.g. an automotive dealership, purchases
are generally taken immediately into Inventory in the Balance Sheet and
moved out (Dr COGS Cr Inventory) with each unit sold. In this case, the P&L
shows only a COGS but no opening or ending inventory.

Here is a compound question to the USA GAAP experts concerning Rental
Inventory and the calculation of COGS:
Consider a commercial laundry that handles table linens for the hospitality
industry. Assume that a napkin costs \$1.50 to purchase, it will survive 75
return trips through the laundry to refurbish it (return to Rental Inventory
at a refurshing cost of \$0.03), the rental price is \$0.08 for each of the 75
rental cycles; however, due to the special color of the napkin, it is
considered "seasonal" and the 75 rental cycles will occur over two fiscal
years.

1. How do you record the initial purchase.
2. What is the COGS against each \$0.08 in rental income.
3. What is the accounting treatment for the \$0.03 refurbishing cost?

Wolfgang
(remove contact to email)
www.gestalt.com

Wolfgang Rochow, Jul 5, 2004
11. Gary V. Deutschmann, Sr.Guest

Hi Wolfgang

Since I used to be in the rental business for several years, I can
tell you how we handled most of our inventory.

First, we had NO COGS as we were NOT selling anything!
Rental is considered a 'service' business.
The inventory is a depreciable asset, like a machine.
It has a specific lifespan and shortages of stock are like maintenance
costs of a machine.

Take folding chairs for instance, they were inventoried not by eaches,
but by racks of 150 chairs each. If a rack was short a chair or two
upon individual count, either through breakage or shrinkage, chairs
were pulled from new inventory and added to the rack to insure it was
full to specified count. The replacement chairs were costs to
maintain equipment rack at 150 chairs.

Flatware is an interesting rental item!
Inventory is GOING TO SHRINK no matter what you do.
We allowed a 2% shrinkage without charging the customer for missing
pieces, it made it easier on both them and us.
Needless to say, they received an exact count of assembled place
settings, including napkins, rings and cards, plus a bus tub to take
them to the place of useage and return them later dirty.
We had charts and simply weighed the returned bus tub. Nobody was
going to sit and count dirty flatware and wet napkins, all of which
throws the scales off somewhat anyhow.
If the weight was within chart parameters, no surcharges for shortages
were made. If we did impose a surcharge, the customer had every right
to remove all the napkins and let us weigh it again. If it was still
short, they could do a physical count themselves.
The surcharge rarely crossed 3 dollars, so usually it was accepted no
problem.

Needless to say, we did not inventory flatware either, individual
pieces were in closed bins and if the bins were getting low, below a
line inscribed inside the bins, we would add new flatware to that bin
to fill it back up again.

We did keep track of new purchases of course and the inventory of new
items removed for useage fairly close. To us, usage of new inventory
was the same as maintenance on major machines.
In essence, we were MAINTAINING our Racks or Bins in useable
condition, by replacing parts of the contents of that rack or bin.

I know, clear as mud, hi hi.....

TTUL
Gary

Gary V. Deutschmann, Sr., Jul 6, 2004