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magicman
09-22-2009, 01:56 PM
Since I am now selling items (I figured out the sales tax and submitted my first return last week) how do I do the cost of goods sold?

What do they mean by inventory and the methods?

The instructions for it in the i1040sc are very vague. I am confused. I am going over the forms now for when I start filling them out in january.

HELP!

Thanks.

Evan
09-22-2009, 03:30 PM
For Schedule C inventory, use "Cost". That is the most common method, and is the easiest. And in your business, you probably don't have to worry about fluctuations in the cost of inventory.

magicman
09-22-2009, 03:39 PM
What is 'cost'? Do I just put down what the items sold cost, and leave out what wasn't sold? So 5 items sold at $.75 cost and 10 at $1 would be $13.75 on the form, and the rest of the stock would be left out until it is sold?

I don't write of any merchandise as an expense until it is sold, right?

Evan
09-22-2009, 04:06 PM
Cost of Goods Sold is strictly the costs associated with your inventory. You enter your sales as part of gross receipts on page 1.

Say you had $1,000 worth of services, and $500 received for sales. Excellent. That's $1,500 in income. Now the $500 in sales may have cost you only $100.00 total. Your COGS is then $100.00.

When you buy inventory, essentially what your doing (accounting wise) is decreasing your cash, and increasing an inventory account. That account contains costs. You may buy 100 items at $1 each, and then another 100 items at $2 each. Your inventory now contains $100 + $200 = $300.

Now there are a few ways of calculating what your COST actually is for sales.
FIFO - First In, First Out. Say you sold 150 items, under FIFO, you use the oldest cost (what you bought first) until it is zeroed out, and then to the next most recent purchase. COGS in this case would be (100 x 1)+(50 x 2) = $200.00

LIFO - Last In, First Out. In inflationary periods, this usually yields better results. Under the same facts, your most recent inventory is zeroed out first. So (100 x 2) + (50 x 1) = $250.00.

Weighted Average - This is the fairest way (in my opinion) but also complex. You need to calculate an average cost of inventory with each purchase. In this case, it'd weight out to $1.50 each item. If you sold 150 items, COGS is $225.00. Notice how it is between FIFO and LIFO.

Inventory valuation is a huge section in itself in an accounting degree program. This is a very SIMPLE problem. It becomes quite complex for companies that do manufacturing, because then you have Work in Progress inventory, and have to have a cost allocation system in place.

...and this is why we have accountants!

magicman
09-22-2009, 04:22 PM
So I put down the entire inventory cost or only the cost of what I sold?

If I spent $500 inventory, for the year, I put down $500 on the schedule c, or the say, $150 (my cost) of what I sold?

Evan
09-22-2009, 04:27 PM
No. You write down the cost of what you sold. Thus the Cost of the Goods Sold. You need to keep track of your inventory to know how much you sold. You only write off what was actually sold, the rest is still in inventory.

magicman
09-22-2009, 04:37 PM
So I don't have to keep track of what I have in my inventory or what I spent on an order, just what I sold? I mean, I still keep the reciepts and everything, but only put down what I sold?

What about the starting and ending inventory thats on the form? What if I buy inventory in the middle of the year? Can you explain how the COGS section works?

I'm sorry if I am asking so many questions, I am just really confused.

magicman
09-22-2009, 06:43 PM
I think I am getting this figured out.

I had no inventory at the beginning of the year, so I would put 0 for that box.

For purchases (line 36) I would put down the total cost of what I purchased to sell this year, minus the cost of the items I took out of that for myself (where would that stuff go?).

What are 'Materials and Supplies' and 'Other Costs'?

What happens if I order a lot of stuff at the end of the year and I get a negative number for the cost of goods sold?

Evan
09-22-2009, 08:42 PM
COGS can be complicated. It's possible to add labor costs to it, which you don't have. Again, the form is made complex because many types of businesses need to use it, and in those instances it is applicable.

Starting inventory is 0. You buy $500 worth of stuff, that becomes your purchases. Say at the end of the year, you had sales of $500, but it cost you (using those inventory methods I discussed above) $100. Well, your ending inventory (and beginning the following year) is therefor $400 -- and COGS is $100.

You need to track your inventory (how much you bought, how much was sold, and how much is remaining. Ideally Purchase minus Sales equals Remaining Inventory.

magicman
09-22-2009, 09:51 PM
So I wont need to fill out all of the boxes in the COGS section of the form?

Evan
09-22-2009, 10:35 PM
No. In fact, I don't recommend you fill out any of them. Let a qualified tax preparer do it for you. :)