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Question Year-end inventory value

Bob Carter

SPFG, Supreme Picture Framing God
fire department charges a fire tax
I guess it 'cost' the FD more to put out an 'inventory rich' fire.:D It's amazing to see so many 'creative ways' to find another tax.

My experience as employee was to hold off restocking mdse sold during holiday until after inventory to 'improve' GPM and increased earnings . Then as an owner to search like crazy in January for prior year figures to show as little 'profit' as possible. IRS has created more liars than fishing and golf combined

Bottom line: Tim is right, as usual;)
 

David Waldmann

SGF, Supreme Grumble Framer
My experience as employee was to hold off restocking mdse sold during holiday until after inventory to 'improve' GPM and increased earnings...

You (as I'm sure you must be aware) must have had an employer who was bending breaking the rules. Any business who maintains any kind of inventory is required by the IRS to classify any purchase of inventory as an asset*. It remains an asset until it's sold. So any purchase of inventory is merely a transfer of assets from your Bank Account to your Raw Materials Asset account. It has absolutely no impact on your tax return/profitability.

*I believe I recently read/heard that businesses with very small revenue (under $50k??) are exempt. Remember, not everything you hear/find on the internet is right (or wrong).
 

Bob Carter

SPFG, Supreme Picture Framing God
must have had an employer who was bending breaking the rules.
Employer was huge public traded company. The employer attempting to massage would have been me (under direct supervision of partner, CPA)
It has absolutely no impact on your tax return/profitability
Ponder this scenario: You do $100k in sales on December. You pay many bills due in December on Jan 1st. You purchase $ 15k in inventory but post/pay in Jan 1st (all with vendors awareness). You also pay $15K of purchases in December. On your Statement of Income Those payments show up in Jan. CoG in this simplified example goes from 30% to 15%. At least, that's how every biz I ever owned did it

Inventory done primarily to confirm shrinkage and 'actual' CoG. I'm sure someone might post GAAP rules but I wonder how many are strict adherents. Finding someone that is fits that at the small biz arena like we might be as difficult as finding an honest politician:D

Big guys? Probably post purchases upon receipt; doubt very seriously many/any framers go to trouble to do double posting

$ 50K Exempt? Ithink that used to apply to biz with net profit under $50K, but never applied; maybe first $50k?. Been too long and could easily be wrong and don't know how that applies to non LLC or INC firms. let's face it, i doubt many framers have/need tax advisors:D

GAAP? Ask 10 framers how they calculate CoG and be prepared for 10 answers

Bottom line: follow Tim's advice and develop long term relationship with financial advisor. The real key is develop consistent applications so year to year, month to month analysis is accurately comparative

just my advice
 

David Waldmann

SGF, Supreme Grumble Framer
Ponder this scenario: You do $100k in sales on December. You pay many bills due in December on Jan 1st. You purchase $ 15k in inventory but post/pay in Jan 1st (all with vendors awareness). You also pay $15K of purchases in December. On your Statement of Income Those payments show up in Jan. CoG in this simplified example goes from 30% to 15%. At least, that's how every biz I ever owned did it.
Bob, you're sounding like a newbie.

IF you are on the accrual basis (as required if you carry inventory), it doesn't matter when you pay for stuff, IRS states that it becomes an asset when received. Likewise any completed order becomes Income as soon as complete/billed, regardless of when the cash hits your bank account. As per my previous post, buying inventory is just a transfer from one Asset account (bank) to another (inventory raw materials). Of course, if you haven't ACTUALLY paid for it yet, it resides in A/P for a bit, but that has no functional difference as far as Net Profit goes.

I have had customers ask me to bill them for an order placed in December that we won't ship until January. My response: I can give you an Order Acknowledgment but invoices are not generated until the order is complete and ready to ship. It's not just because I am upholding the Law, the easy excuse is that it's a "limitation" of our software (perhaps built in to ensure you uphold the law).
 

Bob Carter

SPFG, Supreme Picture Framing God
you're sounding like a newbie.
I'll bet a dozen Krispy Kremes that pretty much every framer pays the invoice, creating a check number and assigning that date as the date of check. Just offering a practical answer in a real world setting. I'll bet Acct takes that month's activities (off check register) and creates a Statement of Income. Another dozen says you won't find many framers that do monthly reporting

Two real world examples: our December sales were huge, but Dec Statement reflected those huge sales but Nov (net 30) inventory payables. Then Jan Statement would reflect 'normal' sales but Dec (net 30) payables creating a 'red' January. Reality was the cycle was 12months regardless.

The other real world example was AZ had a change in Rental taxes going up Jan 1. With our mall rents those changes were real money. We paid rents on Dec 1 as usual, but paid 'ahead' rent near end of Dec. at that year rate. It was a loophole purposefully created. So, we had two 'rents in Dec absolutely affecting profits

Let's take a look at the new Trump tax cuts. I'll guarantee We would have adjusted bill paying to reflect the lower tax rate in 2018 at years end
"limitation" of our software
no argument, but Joe frameshop doesn't have that situation and his acct probably simply downloads the QB Check Register
because I am upholding the Law,
remember my statement
IRS has created more liars than fishing and golf combined
I know we both understand the 'correct' way as well as the 'typical' way, my friend.

Reality is a great CPA has your interests primary, not IRS. I'll bet Tim probably can relate a few 'creative' solutions his advisor implemented

Bottom line: have a CPA
 

David Waldmann

SGF, Supreme Grumble Framer
...Joe frameshop doesn't have that situation and his acct probably simply downloads the QB Check Register...
When you set up QuickBooks you have to select Cash or Accrual basis. All your financial statements will reflect that selection.
 

Bob Carter

SPFG, Supreme Picture Framing God
All your financial statements will reflect that selection
perhaps Grumblers here can attest as to how they post, pay and report transactions. I have a 'small, hobby' biz that is solely on QBs. Can't tell you which option I chose. I pay all invoices with credit card if accepted; love that 'cash back' thing. They 'charge' card upon shipment; I pay bill at end of billing cycle. Sometimes thats 40-45 days. Did that in frame up days generating couple of 100,000 miles yearly

How do I 'Report' those transactions?

Bottom line:
I have had customers ask me to bill them for an order placed in December that we won't ship until January
'smart' operators will always seek ways to 'take advantage' of tax laws to improve profitability

not sure why that is in question? The stuff we learned in 1st semester accounting rarely completly reflects what we actually do in reality. Didn't this start over how much framers actually paid in year end inventory valuation?
 

DTWDSM

SGF, Supreme Grumble Framer
Bottom line:
'smart' operators will always seek ways to 'take advantage' of tax laws to improve profitability

not sure why that is in question? The stuff we learned in 1st semester accounting rarely completly reflects what we actually do in reality. Didn't this start over how much framers actually paid in year end inventory valuation?
Bob, I learned nothing (seriously) in 1st and 2nd semesters of Accounting, my worst class ever in college.....

Again, Get a good CPA, discuss how you buy your materials and then come up with a plan on how/when you are going to report it on your monthly/quarterly/annual reports. Stick with it from there on out, do not change how you do it each year because you might save a buck or two, if you get a good CPA he/she will take care of you in the long run, both while you have your business and in the years after you sell it.
 

Bob Carter

SPFG, Supreme Picture Framing God
Tim we are both 'seasoned' enough to remember those green column worksheets, 'll bet. I wonder what they use today w ith so many electronic options.

I'll guess very few use a CPA and I can't imagine a more instrumental pro. We did monthly Statement of Income reports and numerous conversations. We often got criticized for record keeping, but rarely spent more than 15mis a day

much less than on Grumble:eek:
 
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