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Inventory/purchases discrepancies


ILLMAS

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Facts

Beg. Inv 4,000,000 12/31/20 BS

End Inv 5,000,000 12/31/31 BS

 Purchases on P&L 13,000,000 12/31/21

COGS on tax return 4M + 13M - 5M = 12M

Questions 

Maybe this is accounting 101, but I cannot figure out why the purchases are overstated if inventory is being track in QB, can someone think of why I’m getting this difference?

I will ask the client if maybe a non inventory item was posted as inventory.

Thanks

 

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I’ve found QB inventory module to be heinously inaccurate if there is any WIP (work in progress) involved at all. Also, the data entry has to spot on as far as units, costs, etc.  Does the client ever do a physical count?  That’s a very significant difference. I agree that clients lump a lot of stuff into Purchases. 

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To further clarify, if set up correctly, inventory purchases should be  debit Inventory asset and credit A/P

When sold it would be a debit to purchases and credit to inventory.  

Even though it's being called purchases in QB, it's actually a COS account.  

What I do on tax return is have the add change of inventory to QB purchases account.  

 

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1 hour ago, BHoffman said:

I’ve found QB inventory module to be heinously inaccurate if there is any WIP (work in progress) involved at all. Also, the data entry has to spot on as far as units, costs, etc.  Does the client ever do a physical count?  That’s a very significant difference. I agree that clients lump a lot of stuff into Purchases. 

Will ask, I don't think they manufacture any products, but will ask, thanks.

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51 minutes ago, kathyc2 said:

The change of inventory is likely already reflected in the "purchases" account.  

IOW actual purchases were likely 14M, with 13M being used and 1M increasing inventory.

Agree, their inventory adjustment entry is like 40K, not the 1M

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35 minutes ago, kathyc2 said:

To further clarify, if set up correctly, inventory purchases should be  debit Inventory asset and credit A/P

When sold it would be a debit to purchases and credit to inventory.  

Even though it's being called purchases in QB, it's actually a COS account.  

What I do on tax return is have the add change of inventory to QB purchases account.  

 

We are going to ask if any bills or invoices were deleted.

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32 minutes ago, kathyc2 said:

I thought your question was why the "purchases" account was different than the BI + P  - EI = COS equation?  Now you are saying you don't believe the ending inventory amount?????

I am rounding numbers, but the 12M purchases includes the (40K) inventory adjustment, gross profit on tax return is close to 1M less vs financial statements, so something is definitely wrong with purchases or inventory.

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I'm 99% certain it's because you are taking the "purchases" account on QB to mean purchases, which is is not.  QB p/l does not have a COS section for materials.  Everything is rolled up into one account, which your client is calling "purchases"  So, if you want to come up with actual purchases, you need to do some back calculations:

Your beginning inventory was 4.  Purchased items totaling  14.  Sold items with cost of 13.  Ending inventory is 5.  4 + 14 - 13= 5  Or to get cos 4 + 14 - 5 = 13

The COS on p/l (which is labeled) as purchases is 13.   You need to put 14 as purchases on TR so that the COS will end up at 13, due to inventory increasing.   The 40K I'm assuming is a true-up number from physical count, which doesn't have anything to do with the problem you are having. 

 

 

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QB COGS = BI + Purch - EI

To get purchases each year, which you obviously need for the tax return, I enter the EI on the tax return first, and note the difference from the BI (which should already be there). If the diff is negative, I add it to the QB P&L COGS amount. If the difference is positive, I subtract.

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First off, QuickBooks is horrible at tracking inventory. Only method it can use is the cost method. As already mentioned, your client may not have it setup right. I had a manufacturing company that was in multi-user mode which enabled the employees who had access to literally screw up the inventory hence large adjustments that I insisted were red flags. I feel your pain with this but hopefully your client can shed some light on this to help you.

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