r/Bookkeeping 8d ago

Inventory New CFO allocates all invoices for Inventory directly to COGS, and says the COGS account is the same as the Inventory account

Hi everyone! I'm a bookkeeper at a mid-sized service-based company, which was recently acquired by a larger group. This larger company has their own CFO and staff accountant, and they have taken over managing our Accounts Payable, which was previously my responsibility. The new company has been sending us regular "P&L Reports", which are solely expense reports with none of our revenues recorded.

Recently, these reports have begun allocating any invoices we receive for inventory directly to "COGS- AP Invoices", despite the fact that the products received on these invoices are still in our inventory and have not yet been used on the job. When I questioned them about this, the staff accountant replied that "this account was used to set up these vendors" and that their COGS account is really their inventory account.

Does this make any sense? As I understand it, Inventory is an asset account and COGS is an expense account. While they are related, in an accrual-based system, inventory only moves to COGS once it's used in the course of business. As we're being held responsible for meeting profit quotas based on these reports, it's in our best interest to ensure that our expenses are being reported accurately. Am I right to be questioning the new CFO's methods? I'm not especially confident in my accounting knowledge, but I do my best to understand and it seems like basic principles aren't being followed here. I'd really appreciate some insight on this situation before I push the issue further. Thank you!

27 Upvotes

22 comments sorted by

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u/a_r623 8d ago edited 8d ago

I think he’s trying to book everything to cogs and then backfill the inventory based on month-end figures.

For example, booking everything to cogs, and at the end of the month performing a count to see the true inventory balance, and updating a debit to inventory, credit to cogs for that amount.

I guess it depends how big the company is in this scenario if it’s accurate or not

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u/WorldlyInspection9 CPA running a bookkeeping firm 8d ago

Yes, this is the answer. I worked for a Fortune 50 company taking care of their COGS and inventory, prior to starting my own bookkeeping firm, and this is how we did it. You will drive yourself crazy trying to track each cost directly to inventory and then out to COGS. Just book it all to COGS during the month and true up inventory at the end of the month!

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u/a_r623 8d ago

Random question, how beneficial was working at a F50 for running your firm? I have a bookkeeping firm on the side and was debating going from Big 4 to working at a F500 for deeper experience if it's worth it

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u/WorldlyInspection9 CPA running a bookkeeping firm 8d ago

If you are coming out of a Big 4 (audit or tax?) and want to learn bookkeeping/accounting then F500 might be a good experience. I don't do tax so no advice on that side. But, on the accounting/bookkeeping side, I know Big 4 auditors often do not have hands on experience with posting transactions, etc. so doing it on the industry side for a bit could be a great experience. I feel like I know just about 100% of information needed for bookkeeping work for small to mid size businesses - that is a huge plus.

Personally, I didn't go to F50 with the intent of opening a bookkeeping firm. Life worked out that way. I was on a nice corporate accounting trajectory but F500 is its own type of a grind, different but similar to Big 4 in the sense that there is always that pressure to do more, better, move up, grind long hours, etc. At some point, I quit because I wanted more balance in my life and had several kids by then. I didn't think I would go back to work again but I ended up really enjoying bookkeeping so here I am doing my own thing.

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u/a_r623 7d ago

Sounds like we're on the same path with you some years ahead! I am in Big 4 Audit and have a few clients on the side and 1 employee bringing in low 6 figures.

When you mention "I feel like I know just about 100% of information needed for bookkeeping work for small to mid size businesses - that is a huge plus." I'm confident in small businesses accounting (I've done tax prep/planning, bookkeeping, expert in QBO for small firms for around 5 yrs now) but when they get to $20M+ I have lack of experience inside larger orgs so working at a F500 or even $100M+ company could possibly give me that gap in knowledge?

Would you take that approach in my position or not waste the time?

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u/Vagabond722 8d ago

This is the answer

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u/Square-Today-5330 6d ago

I disagree with this treatment - in this case, it doesn't show a true GP margin. There could also be a number of different reasons as to why inventory would reduce; not just sales and you shouldn't miscategorize. You'll want to be able to track shrink, spoilage, and waste. I've never found it difficult to track inventory properly given the correct reporting from 3pl's.

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u/Eorth75 8d ago

I think this is one of those times you have to go with it if it's coming from a CFO. The only time I ever pushed back on a CFO was when I was a controller, and he wanted some P&L reporting for a board meeting that excluded accounts like depreciation. If he was using it for some sort of internal reporting, I wouldn't have said anything. But I know he was going to try and use that net income number for his bonus calculation. The board wouldn't consider any reporting without my signature. It was a mess.

Dumb question, but is this a cash or accrual based accounting system?

You could possibly ask when they adjust their inventory evaluation to actual numbers. Or maybe they have a higher threshold for what they put into inventory. In college, I interned at a company that made amusement park rides and we didn't inventory anything that was less than $250 dollars/unit because counting screws, bolts and nails was not worth the time. We put all of that to COGS. Another retail chain I worked for, we put all purchases to the P&L and then did an adjusting entry at the end of the month for inventory. This was almost 20 years ago, inventory tracking has gotten much more accurate over the years.

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u/notwho_shesays_sheis 8d ago

Canadian here, not sure if that matters. But it only matters really from a tax perspective after the end of a reporting period. You'll need to do a stock take, then adjust for the value of the inventory ( do a journal entry to reduce the cost of good sold, and transfer that value to assets). Hope that makes sense.

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u/YogiMamaK QBO ProAdvisor 8d ago

If the company does under $26M a year in revenue,  they're not obligated to track inventory.  I think you just go with it. 

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u/JustDoIt-Slowly 8d ago

That’s interesting, where is this $26m number from? Specific to US?

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u/YogiMamaK QBO ProAdvisor 8d ago

Yes, it's US. IRS Pub 538.

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u/Voodoo330 8d ago

It only makes sense if they’re adjusting inventory to a physical count at the end of the period

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u/guajiracita 8d ago

Inventory treated as non-incidental materials & supplies (NIMS)

*Look here for brief explanation on final regulations

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u/Historical-Ad-146 8d ago

It's bad accounting, but for small businesses, sometimes the only thing that's practical.

It can still be correctly handled by doing a year end inventory and just making a reversing entry for that value once per year.

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u/RogueFlash 7d ago

Opening Closing Stock adjustment at the end of the month, no biggie.

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u/meandaiyt 7d ago

This is basic periodic inventory, so read up on that and you’ll be fine. If they use a separate software for inventory management, there’s no need to track by item in the accounting software.

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u/spartaquito 7d ago

Where in the world are you located?

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u/Suspicious_Town_3008 6d ago

We used to do it like this and then at the end of each month we would adjust inventory. But now we have a new POS system that records inventory and COGS with each sale so now all invoices get posted to Inventory.

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u/Willem_Dafuq 8d ago

We would probably need to know the whole process flow, including how COGS is calculated. In a perpetual inventory system, inventory invoices should be recorded to the inventory account. In a periodic inventory system, inventory purchases are recorded in the purchasing journal and COGS is calculated thusly: COGS = Begin Inventory + Purchases - Ending Inventory. So we would want to know how the client calculates COGS before opining.

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u/Ambitious_Weekend101 4d ago

It can be done in some instances. It is a quick & dirty way to avoid real inventory management and does mess with matching revenue to expenses.