CASE STUDY $300,000 Inventory Accounting Mistake
A significant inventory accounting mistake led to the overpayment of tens of thousands of dollars in income tax!
Typical Challenges
For the last few years, business and profits have looked pretty good for PC Promotions owner Jody Cunningham. And despite paying his bookkeeper over $100,000 per year, Jody was a typical sales-oriented owner who wasn’t sure if his books were accurate or not. Our FCFO Exploratory Review turned up several items that could be improved including Syncore Best Practices, Freight Profitability, implementing Commissions Accrual, and the Month End Reconciliation process. But our FCFO team was particularly suspicious of a continually growing inventory amount on the balance sheet despite relatively flat store sales. This required further investigation!
Serious Problems = Deeper Dive
A deeper dive revealed a process error that Jody’s expensive Controller failed to catch – upon invoicing the client, revenue was being captured but not the cost of goods sold! This had been going on for three years to the tune of $300,000. Unfortunately, PC Promotions wasn’t quite as profitable as they had thought, but the good news was that Jody was due a nice income tax refund after refiling the last 3-years tax returns!
Suggestions for Improvement
Running your inventory status report and matching the results to your General Ledger is an easy way to catch mistakes like this. We suggest performing this process monthly and go to the next step by performing a physical inventory count at least once per year. If your inventory report doesn’t match your G/L, then further investigation can find the problem and fix it right away while everything is top of mind with your staff.
Like most accounting issues, regular inspection by a qualified professional can catch mistakes before they become chronic. Unfortunately, this won’t be done by your CPA. They typically don’t know your ERP system, don’t really understand the nuances of the promo industry and are usually just preparing your tax returns based on the information you provide. They are not auditing your books for accuracy like we do for our FCFO clients!
The Promo Consulting Fractional CFO Exploratory Review is an inexpensive way to see if you can trust your financial statements!