Looking for advise about Burned Stock

[majed]

Dears

Glad to join your reputable message board. I have one dilemma about how to treat burned stock (Caused by Accident) in my company. The goal is to reach correct PL and balance sheet. The story >> We have in Oct 2021 a fire catched one trailer which include CCTV products (Value is 2.6M). The trailer unfortunately was not insured, therefore we would be accountable for the loss of goods. Now the goods has been excluded from our inventory which affects our end of the year closing stock and thus affects COGS and profit.

Now our PL calculation should be like this>

Opening Stock: 17.5M
Purchases: 89.5M
Closing Stock: 36.7M (Burned Stock is excluded)
COGS = 17.5 + 89.5 - 36.7 = 70.3M
Sales: 82.7M
Gross profit= 82.7 - 70.3 = 12.4M
Expenses: 7M
Net Profit= 5.4M

Now here the closing stock should have higher value (If there was no incident) which increase the COGS and reduce profit. Our finance manager insist of creating a Provision for the same value of burned stock. But if we do then the loss will be counted two times (2.6M X 2), Once in the inventory side, and the other in provision side.

Happy to hear everyone comments please!



MJ

 

[kirby]

The burned stock of 2.6 M should be disclosed separately in the Income Statement and so not affect the COGS. COGS is the cost of what you SOLD and the burned stock was not sold. So, make an entry to DR Inventory Loss by Fire (or something similar) and CR COGS. So, your Income Statement might look like:

Sales 82.7 M
COGS 67.7M
Gross Profit 15.0 M
Inventory Loss By Fire 2.6M
Expenses 7M
Net Profit 5.4M

And you are correct, if you create a provision for the same value of burned stock then that is an error. That error will count the loss two times.

 

[majed]

Thanks Kirby,,, I find your logic is clear and straightforward, In that sense if issue an invoice with Zero value to all burned stock, then it will be logically counted part of the COGS (Cogs will be higher by 2.6M), Which eventually comes to the same conclusion we have right ?

Cheers,

MJ

 

[kirby]

Again, you did not sell the burned inventory. If it was not sold it cannot be part of the Cost of Goods Sold.