Inventory / How low do you go?

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HarryGMCPF

MGF, Master Grumble Framer
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When taking an inventory of your store/shop/gallery, how low do you go?

What I mean is, what do you count and when is it too small to count?

For example; matboard, at what size scrap do you no longer count it? How do you count it. By individual item number, by family(ex. all C1500's in one group), or some other method.

How about hardware? Do you count it at all? Do screw eyes get counted/estimated or ignored.

Cut moulding lengths, at what size does it become srap?

Glass. Do you count by the lite, by the box, do you include scrap in that?

I appreciate your thoughts.....
 
1) Mats – only full sheets

2) Hardware – only full boxes

3) Moulding – nearest foot. Less than 1’ goes for fireplace kindling

4) Glass – full sheets. Scrap not counted.
 
matboard - full sheets and half sheets by type
hardware - full box, 1/2 box, 1/4 box etc.
Glass - # pieces per type - no scrap
Finished pieces on wall by mtls cost
prints - by each
 
1. mats-- full sheets only
2. hrdwre- $250 to 300
3. moulding- over 3 feet to nearest foot
4. glass- full sheets only
5. finished pieces/gallery- cost
6. prints - each
 
Do what your accountant advises you and then do it consistantly year by year.

Everyone does it differently so you really should not base your decision by what you read here.

Base it on what your accountant says. They know how to "play" with the numbers if needed.
 
Tim-Excellent advice.

You want to bet very few will heed it?

I appreciate that we don't count every V nail, but at $80.00 a box for corner hardware, I sure will calculate $40.00 for a half box

But, if you do it consistently (as you suggest), it might all come out in the wash eventually
 
What is the purpose of your taking an inventory? If for income tax reporting pruposes, first heed Tim's advice. One thing I will tell you is that you probably shouldn't be inventorying things you don't "sell". So unless you have a line item for "screw eyes", "wire", "v-nails" and "bumpers", on your invoice (visible to the customer or not) there may be no need to inventory them, as they should be expensed as part of your overhead. But listen to Tim.
 
Hello David-Do you think that we framers are sophisticated enough to take, for an example, an Invoice from, say Nielsen, that totals, say $600, but $30 of that might be spring clips, and $80 might be for a box of Quik-Corners and $15 might be for snap hangers and only list $475 as Inventory Purchases?

I'll bet that most will list the full $600 as inventory.

In essence, if you buy it as Inventory, you ought to count it as Inventory. And, I am certain your Accountant would agree.

But, if you do go through the trouble of extracting those items from Invoices and list them as expenses, then I am with you all the way

For us we do list spring clips as Inventory, but at each spring clip costing a penny each, I'm not counting every stinkin' clip, but I sure will give a fair assessment to how full that box might be (as in "That box of 1000 looks about half full"

Why do we keep making things so dad-gummed difficult?
 
Being a one man operation I opted for a cash basis instead of an accrual accounting system and I expense everything purchased for the framing operation as cost of goods sold unless it is equipment. I do track advertising, office, utilities, telephone and other operational expenses, but I don't carry any items as inventory.

I know many might disagree and say I don't know where I am as far as profitability if I operate on a cash basis and negate inventory fluctuations, but after formerly operating three stores with over a half million dollar cost inventory, I'm burned out on the accounting aspects and just want to pound nails.

I've done this long enough to have a sixth sense about the numbers and often astounded my CPA with my quite accurate "seat-of-the-pants" figures as to where the business stands.

KISS is now my motto. It really is easy to get so caught up in the numbers in a small business and, taken to an extreme, it can be worse than not worrying about them at all. I've ssen cases where small business owners lived and died by their accounting and ratios and ignored common sense on marketing and planning their business.

Dave Makielski
 
Bob, I'm with David, some things are just plain shop supplies. Mat, foam, moulding, glass are in my COGs #s. (and, yes I do separate invoices to at least that level!)

My accountant said inventory what you have "left" of your COGs purchases that you are "sure" will be used in a future job. Given that advice, Harry's question could actually be revealing.

He and I have talked. I Count "uncut" things. Pieces essentially are expensed, and as you said, it all comes out in the wash. If I use a "scrap" piecce of something in a job, my "effective margin" (I made that up) is higher, so my net is higher in the following year.
 
I'm not disagreeing with David-just wondering if the average guys does break down invoices that accurately?

It all goes back to Tim's advice:

Rely upon your CPA's advice and do it consistently

I am fortunate in that my CPA is my partner

Believe I do it his way
 
Bob, i thought that you would be one of the few that would break it down like you said.

I do break it down as Cliff says, mats, foam, glass, hardware are framing supplies, once a stick of moulding is cut, it is expensed. Helps our "effective margin" as Cliff puts it.

I have been told that I should do things they way that you mentioned but when all things wash out I end up paying more taxes, but your way isn't wrong either.

Now, if you are paying 80 for a box of hardware, that might be wrong, depending on what you are getting.

The only wrong thing that anyone could do is not consult your accountant.
 
Heck, Tim-That is way too sophisticated an approach for someone as simple as me. It's taken me years to just get the sub accounts correct. Splitting invoices? That's for folks way above my pay grade

Besides, I do whatever my partner the CPA tells me

But, if you read this forum long enough, someone will swear they include labor into CoG. And, I have to admit, they leave me in the dust in being able to understand that one.

Makes my head hurt just thinking of all the implications. If I was that smart I would probably be an accountant for the GSA or OMB.

So, I do as I am told by those much, much smarter than I. That includes both my wife and my partner.

P.S. They are both much better looking than I, also
 
Originally posted by Bob Carter:
In essence, if you buy it as Inventory, you ought to count it as Inventory. And, I am certain your Accountant would agree.
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That's what I meant. When you buy spring clips it goes in an expense account such as "shop supplies" or "hardware" or however you have it broken down. Whereas moulding, glass & matboard go into an inventory asset account.

I would have thought that with the POS systems you guys have that it would break things down like that. Then again I seem to recall that the POS systems don't have any accounting brains, so maybe invoices just go right into QB or such and never even see the POS?
 
Originally posted by Dave:
Being a one man operation I opted for a cash basis instead of an accrual accounting system and I expense everything purchased for the framing operation as cost of goods sold unless it is equipment. I do track advertising, office, utilities, telephone and other operational expenses, but I don't carry any items as inventory.
Dave Makielski
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I am with you, Dave. I, too, am a one-person operation; thank goodness I have a great accountant :D . I count expenses as anything I purchase for the shop--down to the paint I use on the walls or other shop improvements. I am careful to keep receipts of payouts, but he does not require me to take inventory. Maybe I am considered a "low man (or woman) on the totem pole" compared to other businesses, and that's OK with me!
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This is why I asked.

As I suspected, everyone has a different opinion. I asked because in the past (with a BB) we counted everything. Moulding downd to 1', mats to 1/4 sheet, glass to the lite, estimated hardware by the 100s, cardboard corners/plastic bags, estimated rolls of DM tissue, sheets of FC, plexi, and gator (including scraps) and estimated # of full sheets, all retail product down to the OOK hangers.

I just completed my YE inventory and after talking with Cliff and discovering that he an I did this so differently, I had to ask the question.

For the record, I have consulted my accountant and after many coverstaions about where my dollars are tied up, we agreed upon an approach that will work for me.

Before that however, I have a few questions that I have in response to some of the comments. I must preface all of these with the fact that I am not an accountant nor do I play one on T.V. SO those of you with a better understanding of accounting practices, please don't lynch me for what I am about to ask. I am just asking, because that's how I (we) learn.

1. Why would you not include hardware such as springs and corner plates in COGS? Aren't spring clips and corner hardware as essential to building a metal frame as the moulding itself? Can you finish a wood frame fit without craft paper, staples, ATG/Glue, and hangers. Is that not part of the cost of goods to produce that item?

2. If you purchased a box of 8x10 or 11x14 glass would you count it? YES! So why not inventory the scrap you have cut down to a standard size? Does it not have value? Not much I understand, but is it not an asset of the business?

3. For moulding that you regularly stock, why not count down to 2' or maybye lower? Arne't the odds good that you will sell it if it is a regular item? How about the 10 or 12' left from a special purchase moulding? Does it not still have value?

4. Matboard: If you cut scraps down to standard sizes and sell it as a retail product, would you not count that for inventory purposes. Why not count the sheets down to 1/4 sheet. Are you going to through it away because it is 20 1/2 x 18 1/2? Probably not. Why? It has value. No?

5. I would consider shop/office supplies to be things like, floor cleaner, toilet cleaner, trash bags, paper cups, copy paper, etc... not spring clips. Yes? No?

Anyway, let the lynching begin.....
 
Accounting principals for a public corporation are a lot more controlled Harry. Most of us are independent businesses. That is the basic reason for the lower standards of inventory counting.

I remember counting every screw, nut and bolt in bins when I was an auditor for 2 major retail fortune 500 companies. counts as 1/2 box simply were not allowed. To most of us........ we have a handle on what we have with or without an inventory.

The simple fact is that if we are consistant from year to year and follow the suggestions of out tax preparer, we will by fine with whatever way we take inventory.

Another thought...... With all the big time financial scandals (Enron, etc), we are all doing a very accurate job.
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I believe that the larger the business the more cost effective it becomes to "sophisticate" your accounting. Yes, if you are going to track mat board and you keep 16X20 or larger pieces for future use or for resale, you should track these as otherwise your inventroy is relatively meaningless.

I am not using the inventory tracking on my POS (FrameReady), but may someday decidee to start tracking items simply so that I know whether it is in stock or not without having to physically check the bin. However, if I don't use the system completely and not keep track of that 16X20 piece I've defeated the major reason I would utilize the tracking system.

Dave Makielski
 
If taxes were simple, we would put thousands of lawyers and accountants out of work. Having said that, I doubt that taxes will ever be simplified.

Keep in mind, if you count everything as inventory it will lower your COGS.

Lower COGS = Higher profit
Higher profit = higher taxes

We want to stay honest (and out of jail) but we only want to pay our fair share of taxes.

The best advice here so far is to check with your accountant.
 
Counting scraps of mat board and glass which you might be able to use will probably get scratched in the process and neither will be useable.
 
As usual, let's make something that is pretty basic an dmake it as convoluted as possible (we all ought to work as bureacrats in the Gov't)

Let's take this to the extreme:

If you EXPENSE items such as spring clips, then, technically, you should pay Sales Tax on those PURCHASES-the same as if you bought a roll of paper towels. How many will do that and how many Distributors will reconfigure their invoicing to accomodate

In AZ and TX, sales tax runs mid seven to low 8 percentage and you must pay sales tax on everything we purchase except if it is to be re-sold, and then the seller is required to collect that sales tax

And, if it is to be RESOLD then it's INVENTORY

That alone ought to sway your decision

But, I know it will not. And, I know not a single person will start paying sales tax on those items that they wish to call EXPENSES

I also know that someone will find one of those "Yeah,But" exceptions to the above
 
Bob,

I mentioned exactly those concerns to my CPA and she gave me the figurative "pat on the head" (usually reserved for children) and told me not to worry about it.

Yes, the Sales Tax issue appears to be the differentiator, but apparently the IRS recognizes that the fact that from one fiscal year to the next the amount of such "inventory supplies" (a new term I made up?) is consistent and will yield the same result with a small change of practice, they pretty much ignore it.

Therefore, although you are technically correct relative to resale issues, it is seems it is better to do the simplest thing that is allowed.

Yet another case of trying to apply common sense while still adhering to the law. (often a conflict, but that's probably a whole 'nother thread! ;) )

[ 01-05-2006, 12:28 PM: Message edited by: Cliff Wilson ]
 
Springs and clips are a componet of the manufacturing process. We take raw materials and produce a value added product which we charge sales tax on.

I guess the real question as to how low do you go...

Does anyone inventory the number of drops left in their glue bottles???



Dave Makielski
 
Originally posted by Bob Carter:
As usual, let's make something that is pretty basic an dmake it as convoluted as possible (we all ought to work as bureacrats in the Gov't)
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But Bob, that's what this forun is for isn't it? Take the simple and make it not so.
 
I was thinking of using teaspoons. Your thoughts.
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Harry...

But what would you do after you got down to the last teaspoon and there's still some left in the bottle?

:confused:

Dave Makielski
 
David, although many will load invoices and split them into various product groups on their POS systems and alike it is possible that they do not differentiate "Non-Stock Items" and stock items for inventory. The accounting end of framing is fairly poorly supported by any software system - at least I have not yet seen any standard system that does not rekwire manual "intervention" of some degree, but then we use a multi store POS system designed with retail of goods in mind rather than manufacture, generally in this type of environment it is far easier to spot the difference (if it's not going on the shelf then its an NSI).
 
Don't forget to portion out a part of your water bill to cost of goods sold.

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Dave Makielski
 
Originally posted by Bob Carter:

If you EXPENSE items such as spring clips, then, technically, you should pay Sales Tax on those PURCHASES
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Maybe it varies by state. In Vermont there are two basic exemptions for Sales Tax. Items you are re-selling, or tangible items "that are used, consumed or otherwise lose their identity in the manufacture of other tangible items for resale". We consider that to include glue screws, lumber, etc. The auditor we spoke with also told us that frame shops buying moulding from us also fit in that category, unless they are selling length moulding.
 
Originally posted by Maryann:

Keep in mind, if you count everything as inventory it will lower your COGS.

Lower COGS = Higher profit
Higher profit = higher taxes

We want to stay honest (and out of jail) but we only want to pay our fair share of taxes.

The best advice here so far is to check with your accountant.
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Just wanna say, I agree with Mary Ann.

Harry, above is my answer to all of yur questions
 
Now, see, David, you got me all bumfuzzled again. If I buy mldg from you and chop it up into a frame and sell that frame it fits into one category, yet, if i buy mldg from you and sell it to a client and he takes it home, it's another category?

Okay, which do I collect Sales Tax on and which do I pay the Sales Tax to you?

Man, this Retailing stuff is way too complicated for me

I just going to have to rely upon advice of CPA/Partner even more, because I never knew that there were that many different categories
 
This all seems like a no-brainer to me and my Idaho CPA.... and I realize every state could be different....

Exceptions to every rule. Much depends upon whether the CPA only knows black/white or will recognize, DEFENSIBLE with shades of gray.

If it's RESOLD, it can Either be inventory or a component of the manufacturing process and taxed at the retail level after being included into a manufactured product

If you sell a tangible product for retail, collect sales tax.

If retail labor is specifically itemized as a separate line item, no sales tax is due for that line item. We don't line item labor except for installation or consulation.

If a customer properly completes a State ST-101 form (resale affidavit), no sales tax is collected. There is a blank for resale certificate number, but the signature is the important item since it is a legal affidavit as far as the Tax Commission is concerned.

If you purchase a wholesale item that is for resale, OR to be included in the fabrication of a product for resale, then you are not required to pay sales tax because the retail consumer will pay the sales tax for the retail price. There are times when it is easier for me to pay the sales tax and just forget about it. The ST-101 hassle isn't worth it when dealing with some local companies.

If I provide ANY vendor, store, etc a properly completed ST-101, no sales or use tax is charged to me and it is my affidavit signature that the item(s) purchased will be for resale or inclusion into a manufactured product for resale.

If you purchase an item that is to be used in your business, but not resold, then it is subject to "Use" tax which is the same rate as sales tax.

As far as inventory goes....By mutual agreement w/CPA
</font>
  • Full sticks of moulding only.</font>
  • Full sheets of matboard only.</font>
  • Full lites of glass only.</font>
  • Full sheets of foamcore only.</font>
  • Std size readymade frames - Not Inventoried... tossed into dumpster if questioned</font>
  • NOT inventoried..Hardware and other "stuff" that might be used in completing a retail frame job ... SMALL TOOLS AND SUPPLIES and the accountant takes care of it. That's actually MISC but the accountant will not let me call anything MISC without an explanation. Small tools and supplies passes the accountant's scrutiny by mutual agreement.</font>
  • Framed artwork on display... OFFICE FURNITURE because generally speaking it is not for sale, only an example of the work we do.</font>
 
Originally posted by Bob Carter:
Okay, which do I collect Sales Tax on and which do I pay the Sales Tax to you?
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Originally posted by David N Waldmann:

In Vermont there are two basic exemptions for Sales Tax.
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You are exempt from paying me tax on either. It's only a matter of which form you fill out. I was merely pointing out that the state (of VT, anyways) recognizes the basic difference between things you re-sell (inventory) and things that become a part of things you sell (non-inventory). At least that's the way I interpret it.
 
When I was located in the state of Indiana I went through a state sales and use tax audit. Laws vary by state, but several interesting turns happened.

I really wasn't worried about the audit until the day before the auditor was to arrive he called to say that his district manager was coming along to oversee the audit. :eek:

We had a relatively large digital imaging center and I had decided to go against the advice of my CPA and filed an ST-101 with my leasing companies (for the output equipment) and my suppliers of paper, toner and ink jet supplies. I reasoned that the equipment was manufacturing equipment and the supplies were raw materials. We charged sales tax, where applicable, on the value added manufactured product...color copies and digital jet prints, signage, etc.

If the auditor didn't agree with my interpretation of state law, my liability would've been around $ 20,000 with interest and back taxes.

The audit was going quite well and no problems surfaced until this issue came up. I held my breath, said a quick prayer, and explained my stance. The regional manager said, "Oh, I understand, I used to work for R.R. Donnelly (one of the largest printers nationally) and I agree with your interpretation."
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Needless to say, I breathed a sigh of relief, but acted nonchalant.

Interestingly enough, Indiana state law considers digital output equipment to be manufacturing equipment, but optically reproducing equipment (for instance, non digital copiers) to not hold the same status.

We hadn't been audited in over thirty years and I ended up with having to write a check for just under $ 400.00 going back 5-7 years. Most of our liability was for some store fixtures I bought and magazine subscriptions I neglected to pay tax on. The auditor shook my hand and congratulated me for running a "clean" operation.

When I asked why we were singled out for an audit, it turned out that we never reported any use taxes and that sent up a red flag. I explained that we bought items used in the office and store through normal inventory vendors and then charged any items used to ourselves costing items out to individual departments. Each month we wrote a check to ourselves paying wholesale cost and charging sales tax accordingly. She said she had never seen anyone do it that way, but it was perfectly legal.

Now I make absolutely sure I include some use tax on several returns through the year!

Dave Makielski
 
Originally posted by DTWDSM:
</font><blockquote>quote:</font><hr />Originally posted by Maryann:

Keep in mind, if you count everything as inventory it will lower your COGS.

Lower COGS = Higher profit
Higher profit = higher taxes

We want to stay honest (and out of jail) but we only want to pay our fair share of taxes.

The best advice here so far is to check with your accountant.
Click to expand...
Just wanna say, I agree with Mary Ann.

Harry, above is my answer to all of yur questions </font>[/QUOTE]I understand. Don't give it to Uncle Sam if you don't have to. I get it. ...and I agree with that.

Like a I said, I have consulted with my accountant and we have decided on an approach that works for me and my vision for my business.

I was just curious what other folks did for inventory. ... and doing what I ususaly do when I am trying to understand all of the implications of something; I am asking too many questions. :D

I don't come here looking for the one right answer or that magical "silver-bullet" because I know we are all different and operate differently. I am simply looking for ideas and opinions and there is never a shortage of either here on the G.

Thanks for you help with this. I appreciate the feedback. Keep it comin'
 
Okay, David, you don't charge me Sales Tax on my moulding purchases from you. Agreed

Now, what do I charge my first customer that received a completed frame project in Sales Tax

And, what do I charge my customer that bought moulding in length, as in your example

And, for real world use let's say that both clients used exactly the same mldg and exactly the same amount and that amount at Retail would be $100

If someone tells me it depends, we know that this discussion has Officially Left Planet Earth. I'll bet my unused tickets to the Rose Bowl that there is not s single person that would not collect exactly the same amount of sales tax from the customer

Who was it that indicated that their CPA patted them on the head and told them to "Not worry about it"?

David, you might try that on your auditor friend. And, that is the best advice ever
 
David,

I don't sell moulding, I don't sell glass, I don't sell mat and backing boards. I sell Picture frames, and the moulding, glass, matboard, etc are parts of my final product much the same way sand, gravel, and cement are the raw materials for concrete. My suppliers sell, moulding, glass, matboard to me. I frabricate picture frames from these supplies. I think this is an important question and is fundamental to how we run our businesses. It's much better for us little guys to consider moulding, glass, matboard as supplies rather than inventoried finished goods, much, much better.

Warren
 
Bob, both customers would pay the same sales tax if both sales were $ 100.00.

The first customer received a completed frame package which is a custom manufactured good sold directly to the consumer. It is a value added product and would be taxed at the sale price.

The second customer bought a product that you purchased at wholesale and resold at retail. He too would pay the sales tax on the retail price of the moulding.

In Michigan, they would each pay 6% or $ 6.00 in sales tax. Of course either customer could be reselling the product and file their tax exemption with you. In that case they would not pay sales tax as they are not the final consumer. The final consumer would pay sales tax on whatever price they bought the product or finished goods for...unless they were a tax exempt entity for religious, governmental, agricultural or not-for-profit reasons or were a direct pay entity and filed an ST-105 form with the seller.

:rolleyes:

Dave Makielski
 
Hi Dave-That is a great example with a predictable outcome of how goofy this thread has become.

So, do we have a difference without a distinction? Or do we habe a distinction without a difference?

According to David's auditor (and I like David's postings) there needs to be different categories

The truth is that many of us spend a lot of effort on things that might be best described as minutae. On a typical workorder of $50-60 cost, there might be less than a dollar of these "bumpons, atg and staples"?

I guess I might take a harder exception to "count only full boxes" mentality. I don't know about you guys, but if I buy a box of Museum glass for around $220 and use one lite, I'm going to count that remaining lite (around $110)

And, that will be on the suggestion of my CPA.

But, if he suggests that I do not count that $110 of inventory (can you imagine not counting two boxes of foamcore?) we might just have a Donald Trump Boardroom-type discussion.

And, that would be a hoot since my partner is my CPA

Maybe a better title for this thread ouht to be "How accurate do you want your inventory to be?"
 
Bob,

We have a distinction without a difference.

I agree, this thread has been goofy and fun at the same time.

In answer to your last question...
"How accurate do YOU want your inventory to be?"

That's all that really matters!

shrug.gif


Dave Makielski
 
Bob,

(aside from legal (IRS?) questions for a minute)
Why would you (or I) care? I am assuming you are "small" enough that you don't have an MRP or do quarterly inventories for public reporting purposes.

I would guess that most of us do an annual inventory primarily for tax reasons, but also to give us a better idea of how well we're managing that aspect of the business. If I don't count the lite of museum glass, when I use it, I get a higher margin on the job I use it on, but in the aggregate, it comes out in the wash. Doesn't it? Each year there will be some "windfall" margin jobs, but the company will be buying new inventory that "won't get counted" at the end.

The same question applies to that half box of spring clips. If I am managing re-order through a different means (again, no MRP) why would it matter?
 
Hi Cliff-I agree that it matters little to most of us

So, for conclusion's sake, my answer is as follows:

How accurate do you want?

What does your CPA recommend?

And, how did you do it last year?

That windfall happens once and as soon as you settle on one system, I'll bet it will flush out yearly
 
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