Don’t understand Schedule C cost of goods sold vs. profit

Don’t understand Schedule C cost of goods sold vs. profit
0

#1

This question goes out to those familiar with the Schedule C Profit or Loss From Business form. If I add up the gross profit made on each unit sold in 2016, it’s roughly $12,000 more than what I get on line 5 Gross profit when I fill out the Part III Cost of Goods Sold. And my ending inventory is roughly $12,000 more than the beginning inventory. Is that why? What does the amount of your inventory have to do with your profit? It looks like I will have more Part II expenses than I need. Can I not use them this year and use them in later years?


#2

geez i’m glad i’m not an accountant gl


#3

Not familiar with the forms, but are you putting all of the inventory you purchased into cost of goods sold or just the costs of the items you actually sold for the year?


#4

I think you need to be more specific about what’s going on.

First, I’ll knock out the easy question - assuming you’re a cash basis taxpayer you cannot defer recognizing expenses to later years unless there’s a specific provision which allows you to do that (i.e. the code/regs allow/require an expense paid in one year to be recognized in a different year).

As for the inventory, how are you coming up with “gross profit made on each unit sold in 2016?” If you have 0 BOY inventory and 12k EOY inventory, your cash flow would show net subtraction of 12k. Therefore, your revenue from sales of inventory would be 12k (plus margin) less than if you sold all of your inventory in 2016.

As for why inventory matters - it’s how you calculate COGS. The goal is to get to a number of the cost of what was actually sold. Otherwise a taxpayer could significantly manipulate the numbers to what they need (e.g. if they need a huge loss in Y1, they could just purchase all of their inventory in Y1 without having any sales and be able to recognize that “loss”).


#5

Actual numbers are BOY inventory $244K, EOY $256K. Gross profit on line 5 comes to $10K but when I add up separately the gross profit on the units sold in 2016 it comes to $22K.


#6

I’ll take a stab at this, but I’m a bit confused by your posts.

Your COGS number is simple to calculate: Part 3 should look like this (I made up the purchases number) :

From there, your gross profit number is simply your sales less line 42. Are you confusing your purchases and your COGS numbers?


#7

This is what we need clarification on. Where are you getting this number? And, I guess I assumed by cost, but how are you valuing inventory?


#8

These are the actual numbers.

35 Inv BOY 244,000
36 Purchases 70,000
38 Supplies 22,000
40 Total 336,000
41 Inv EOY 256,000
42 COGS 80,000


#9

Good, so where does your confusion lie? Your COGS subtracted from your sales number on part 1 gives you your gross profit for the year.

And sweet baby jesus those inventory turns are not good.


#10

I take the price I sold each unit for and subtract what I have in it to calculate gross profit.


#11

Are you allocating your supplies expense to each unit along with what you purchased the unit for? $22,000 of supplies expense must be spread across the goods.


#12

OK, the sales i calculated for part 1 line 1 were short by 5K. Corrected that. Still a 7K difference but close enough. Thanks. Yes on inventory turns. That’s the lure of having too much space, you buy more stuff than you can sell.


#13

You should be able to get closer than $7k…