How to Reduce 'Cost of Sales' for Stolen Stock...?

S_K

At the end of the trading year stock is valued at cost price or price which it can be sold for if this is less than cost price (for example if it was damaged). Therefore stock which is stolen & irrecoverable would be "valued" at zero, and would not be included in stock take.

Though someone mentioned to me that possibly I could increase the gross profit by the cost value of the stolen stock by reducing the "cost of sales" by the same amount. I could then deduct this stolen stock value from the increased gross profit.

The effect of doing this would be to increase the gross profit, although the net profit would still remain the same. The net profit would remain the same whether I do this, or if I simply use the easier method of just not including the stolen stock.

Therefore either method will not affect the amount of tax due, but using the method mentioned the gross profit would be kept more "normal".


For example (these are just example figures)...

If I simply do not include the stolen stock with no adjustment, the trading and profit and loss account will look like this:

Sales.....................10000
Cost of sales...........(7000)
Gross profit..............3000 (30% gross profit margin)
Admin costs........... (1000)
Net profit.................2000


However I adjust for the abnormal loss the trading and profit and loss account will look like this:

Sales.....................10000
Cost of sales...........(6000)
Gross profit..............4000 (40% gross profit margin)
Admin costs............(1000)
Stock loss.............. (1000)
Net profit................ 2000


The net profit is the same in both scenarios, but the normal 40% gross profit margin has been maintained by crediting the cost of sales with the loss and charging it to the profit and loss account.


If I use this method, then I would need to restore the gross profit back to it's normal level by reducing cost of sales and including an account in the business expenses section of the profit and loss such as "theft".

If I use this method, how do I reduce the cost of sales?

The cost of sales figure is arrived at by following equation...

Cost of Sales = Opening Stock + Purchases of Business Stock during Year - Closing Stock

ircoha

So the more thats gets stolen, the higher the gross margin.:) Bring it on:)

The revenue wont buy this either as u could be one stealing the stock:eg if u run a grocery shop.

Anyone such as a bank looking at the numbers and if they pick that up will not be impressed.

The net profit is the same in both scenarios, but the normal 40% gross profit margin has been maintained by crediting the cost of sales with the loss and charging it to the profit and loss account.
yes, however the question is how do you arrive at that entry.

If I use this method, then I would need to restore the gross profit back to it's normal level by reducing cost of sales and including an account in the business expenses section of the profit and loss such as "theft".

If I use this method, how do I reduce the cost of sales?

The cost of sales figure is arrived at by following equation...

Cost of Sales = Opening Stock + Purchases of Business Stock during Year - Closing Stock

Yes in simple terms
Cost of Sales = Opening Stock + Purchases of Business Stock during Year - Closing Stock.
To make it easy lets forget about opening and closing stock

so on the face of it Cost of sales = purchases.

However: cost of sales is in fact purchases less theft.

So what u need to do is track the cost value of the goods invoiced and sold and this is ur real cost of sales.
Therefore the theft will be purchases less the real cost of sales.

Cost of Sales = Opening Stock + real cost of sales- Closing Stock

[Bear in mind that in reality some of the theft may be from opening stock]

In a real business the purchases and the real cost of sales will be measured, and the theft will fall out.

In the case where u wish to contrive the margin then u will know the purchases and the theft and the real cost of sales will fall out, great work if u can get it.

At the end of the day if the accounts are audited, if they are not happy that theft is not included in cost of sales and by not doing so they will decide that the accounts do not give a true and fair view, so they will qualify the accounts.

S_K

Thanks

so are you saying that I should simply not include the stolen stock in the end of year stock take, and not try to increase the gross profit margin?

There is evidence for the stolen stock in that the owner of the business it was supplied to disappeared abroad owing payment to other customers too.

ircoha

S_K wrote:

Thanks

so are you saying that I should simply not include the stolen stock in the end of year stock takeu cannot do that because that would be false accounting as the end of year stock take is exactly that, a physical count., and not try to increase the gross profit margin?I dont see the purpose as any good analyst will see through it

There is evidence for the stolen stock in that the owner of the business it was supplied to disappeared abroad owing payment to other customers too.this would be booked as a bad debt, in other words invoiced and not paid. bad debts are not part of cost of sales

Whats next?;)

S_K

u cannot do that because that would be false accounting as the end of year stock take is exactly that, a physical count

If I do a physical count then I count the cost value of all my stock, therefore as I do not have this stock then it cannot be counted.

So would the cost value of this stolen stock not simply be excluded from the stock take? It's no longer in my possession and is irrecoverable, and therefore it can't be counted.

DublinWriter

I refer you to the magic word known as 'Ullage', or most companies term it 'shrinkage'.

For accounting purposes you should assign your stolen stock under the above headings.

ircoha

S_K wrote:

If I do a physical count then I count the cost value of all my stock, therefore as I do not have this stock then it cannot be counted.

So would the cost value of this stolen stock not simply be excluded from the stock take? It's no longer in my possession and is irrecoverable, and therefore it can't be counted.

Its not a question of it being excluded, its not there to count in the first place!!!!

look at my first post

S_K

So basically you're agreeing with me that it's a simple matter of not including the cost value of the stolen stock in the stock take (as this is stolen), and to not try and amend the gross profit.

ircoha wrote:

Its not a question of it being excluded, its not there to count in the first place!!!!

Precisely. That's why I stated in my 2nd post "so are you saying that I should simply not include the stolen stock in the end of year stock take"

And then you replied "u cannot do that because that would be false accounting as the end of year stock take is exactly that, a physical count."

kluivert

Criminal Act 1994
Companies Act 1963-2005

Be careful.