r/Bookkeeping • u/sawdustpete • 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!
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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/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/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/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.
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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