PDA

View Full Version : Negative COGS and inventory



gabisdaddi
01-18-2014, 11:13 AM
Hi, I just joined the forum on behalf of my wife. She is a jewelry artist and sells at art shows.

I've been doing personal taxes myself since I was sixteen (I'm almost fifty). I'm fairly certain I've confused myself about Cost of Goods Sold, inventory, and income tax. I filed 2012 without an issue, or so I thought.

The thing that's got me confused is that she buys jewelry components but sells finished pieces.

There's a lot of information I'm providing, and I'm hoping everything you need to advise me will be included. Sorry if it's too much info!

She keeps a spreadsheet for account. In the sheet of finished pieces, she includes total cost of materials, cost for time, tag price, date made, date sold, among other things.

My tax filing instructions to myself were this:
to create starting inventory
copy spreadsheet. Delete everything except date made, item number, tag price, sold price, sold date
remove all things sold up to PREVIOUS year (so for 2013, remove everything sold before 1/1/2013)
sort by date made, move out any item made after beginning of tax year tax year filing (so for 2013, after 1/1/2013)

to create ending inventory
return any item made after beginning of tax year tax year filing (so for 2013, after 1/1/2013)
sort by sold date
delete anything sold

To me, this seems pretty straightforward and has worked for three years.

However...

In 2012, she only did a fraction of the shows she had previous (due to death in the family) so she only sold a fraction of what she usually does. Because of the family issues, she also MADE a lot more jewelry than she usually does across the year (jewelry making is therapeutic).

Yesterday I fired up the H&R software, typed everything in, and we get a refund of a few hundred dollars. Fine. There's an error though.

"You can't e-file if the cost of goods sold is a negative number." What?

Inventory at beginning of year 7703
purchases 354
other costs 394
sum 8451
inventory at end of year 10054
cost of goods sold -1603

So I'm lost. I google. I find this:
If you want to do it by finished product, using cost, then you have to figure the cost of materials used in each finished product, then figure how much is left in inventory at year-end, meaning you expense only the costs of making the product you sold. The unsold product is still in your year-end inventory.

At this point I'm lost, find and this forum. I'm hoping I'm just missing a small point to correct my confusion. I'm hoping it's that I'm over thinking everything and not that I'm *really* screwing it up...

Any advice would be helpful. Useful advice would be awesomely helpful :)

Thanks so much for your time!

Paul

AliceT
01-18-2014, 01:16 PM
I don't do my own bookkeeping or accounting, so I won't be a great deal of assistance, but the way I understand it is...

Starting Inventory:
Widgets = Quantity 5
Gizmos = Quality 5

You use 3 Widgets and 3 Gizmos to create 3 Widgmos, so your year end inventory is:
Widgets = Quantity 2
Gizmos = Quantity 2
Widgmos Quantity 3

The price for the Widgmos would be the cost of the Widgets + Gizmos. I do not believe labor is included as it is not an inventory item.

gabisdaddi
01-18-2014, 04:32 PM
Thanks Alice, for replying.

The conflict with your analogy of widgets and gizmos and widgmos (very cute btw) is this: in 2013 she spent a little less than $400 in materials. She used less than 10% of it. The rest of the materials was, is, existing materials purchased in previous years.

That said, lets take your scenario an make it apply to my wife.

Starting Inventory:
Widgets = 50
Gizmos = 50
doodads = 50
doohickeys = 50
clasps = 65

Purchased during the year:
Widgets = 100
Gizmos = 100
doodads = 100
doohickeys = 100
clasps = 0

Then she used some components to make pieces of jewelry so the year end inventory is:
Widgets = 125
Gizmos = 100
doodads = 75
doohickeys = 150
clasps = 35
pieces of jewelry = 35

She might buy a raw material and not use it for five years.

How does one quantify all that?

FWIW, we know the cost of every inch of stringing material, every bead, every piece.

AliceT
01-19-2014, 04:35 PM
Keep in mind that I am in Canada, and my tax rules may be significantly different than yours.

The value of your inventory depends upon your valuation method - First in First Out, First In Last Out, Average. You need to know what you paid for each item in your inventory, so matter what method is used.

Using this as an example....

Inventory at the end of 2013
2013 - 5 widgets @ $1.00 each
Widget value $5.00

Inventory at the end of 2014
2013 - 1 widgets @ $1.00 each
2014 - 4 widgets @ $2.00 each
Widget value $9.00
Plus, the 5 Widgethings that were made, valued at 4 X $1.00 plus 1 X $2.00

The above is ACTUAL cost. Using First In First Out, we would say that the 5 widgets that were used were all purchased in 2013 (whether they were or not), so your Widget inventory value would be 5 X $2.00 and the Widgethings is 5 X $1.00

gabisdaddi
01-19-2014, 09:22 PM
As is my way, when I post a question as I did here, I posted to other forums as well.

What I've learned is that I was doing 2013 correctly, but I had messed up 2012!

Your post, as well as many others, all helped in this conclusion.

Thanks for your input!

GD