Question

3. Your company wishes to determine which inventory items generate the most revenue. How could you use QuickBooks to develop this information?

4. At year-end, you wish to confirm the quantity on hand for each inventory item. How would you use QuickBooks to determine the quantity and value of the ending inventory?

5. Your company wishes to view the profitability of each inventory item. How could you use QuickBooks to develop this information?

Answer 1

Inventory Valuation:

QuickBooks values your inventory using an average costing calculation, as opposed to other types you may be familiar with, such as LIFO, FIFO, or specific costing. If you need another costing method, you will have to use a third party addon program that manages inventory outside of QuickBooks.

This can be a complicated subject – I am only going to go into this lightly. Let’s look at a simple example.

• If start with an item with no quantity, no value, and receive a quantity of 10 at $1.00 each, you will see that the cost is $1.00, and the avg cost is also $1.00. You have $10.00 of inventory in your inventory asset account.
• If I then receive another 10 items, but at a unit cost of $2.00, you will usually see the cost value set to be $2.00. However, the avg cost of your inventory will show as $1.50. We started with 10 items and a value of $10.00, we added another 10 items at a value of $20.00, so we have 20 items with a value of $30.00. That gives us an average cost of $1.50.

If you sell one of these items in an invoice, the COGS account is incremented by the average cost of the item at the time of the sale.

This is a simple example. There are long arguments about the costing calculation that QuickBooks uses – relating to the more complicated situations when you have many added transactions, and other complicated situations.

One thing that I will note, briefly – if you sell all your inventory, and then continue to sell the item so that you go to a negative quantity, the costing calculation runs into problems. It can’t accurately account for a negative balance, and you can see some very odd figures show up in the average cost field, and your inventory valuation reports. Once you bring the balances back to positive these figures should resolve themselves, but it is always a good idea to not allow inventory balances to go negative.

Balance Sheet and Inventory/Stock Valuation reports show different amounts for Inventory Asset account:

Your data file has a discrepancy in the Inventory Asset account:

• The accrual basis Balance Sheet Standard run for All dates shows an amount.
• The Inventory Valuation Summary and Detail reports for all dates show a different amount.

This may happen if:

• You have transactions to Inventory Asset account that do not have inventory items.
• You have inactive inventory items that have a non-zero value.

The troubleshooting steps will depend on the cause of discrepancy. If you're using the Accountant's Edition of QuickBooks, you can use Client Data Review that includes a tool for resolving this issue.

Inventory Profitability in QuickBooks:

To assess the profitability of your inventory with QuickBooks, generate a Profit and Loss Report. This report shows your business income and expenses, and between these two areas, you can see your COGS figure and a gross profit inventory line. Gross profits are the difference between your total income and COGS, and this is the amount of profit you’ve earned from your inventory. If you don’t see a gross profit line, change the accounting method from cash to accrual and run the report again. You can then break profits down by individual items, which gives you the ability to assess which items are most profitable for your company and which items might need to be discontinued.