Accounting Question

[Terry D EA]

While sitting in a year end review to go over the year end adjustments for a manufacturing client, a large inventory adjustment (60K)was made at the close of the year. Client stated their physical count only showed 6K in inventory. After several discussions regarding this adjustment, the client revealed they receive raw materials for production, receive the invoice and have not paid the invoice and therefore they do not include this material in inventory. Their take is they don't own it because they haven't paid for it. I personally feel this should be counted in the inventory simply because some type of bill of sale exists which indicates title to the materials has changed hands. The bill for the materials has been recorded in the payables as well. My understanding is either FOB shipping point or destination point is the point where ownership of the merchandise is determined for inventory purposes. Any suggestions are appreciated

[Janitor Bob]

My employer (a local manufacturing company) tried this a few years ago. They placed an exspensive order for a bunch of steel machine frames. Our VP manufacturing asked the vendor to not ship until January because he did not want to include it in inventory for that year....but for the same reason, the vendor wanted it OUT of their inventory, so they shipped early. Nobody believed me (I said it had to be included in inventory), so they asked two different CPA firms that we retain for auditing purposes. They agreed with me that as long as we took ownership or had significant control over the material, it had to be included in our inventory....It did not matter that we did not pay the bill for another 60 days. Our only option would have been to refuse the delivery.

[JohnH]

Tell the clever client the inventory follows the invoice. If they include it in Accounts Payable, they have to include it in Inventory. I can guarantee you that's what an auditor will do. They can forget about all the FOB niceties - as a practical matter it only comes into play if the goods are lost or damaged in transit. It's more about who has to file the freight claims and who bears the risks of loss.

[Terry D EA]

Thanks for the re-affirmation. I can't tell this client anything but I have been successful with the sales manager and bookkeeper and we will be changing the way they account for inventory. A finger was pointed at me when I asked for clarification of the inventory figures for 2008 because the book inventory minus the adjustments didn't match the information on the tax return. This is the perfect example of why an engagment with specific services is more than necessary. A quick finger pointing to the paragraph in the engagement that states that the returns were prepared from the data THEY provided and that an independent verification or audit was not performed solved the problem. The client got quiet when I said they would need to amend the 08 tax return which would no doubt result in the sole S-Corp shareholder to have to pay some money back. Imagine that!