How Inventory Affects Your Financial Statements

  Mike Bachara   |     Apr 08, 2021

Inventory errors can majorly affect with your dealership’s bottom line. And a lot of the time that has to do with errors in counting. That not only affects your cost of goods sold, but also your balance sheet, and that means the overall picture of your company’s financial position can be skewed. 

Let’s look at what we mean in more detail …

Your cost of goods sold (COGS) is the value of the inventory you sold over a specific time period. This time of year, you are probably looking at your annual COGS. 

To get your total COGS, you have to add your purchases to your beginning automotive parts inventory and then subtract your closing inventory. 

If you overestimate your COGS, then you’ll have a lower net income. Under current assets on your balance sheet, ending inventory will also be understated. 

If COGS is understated, then you’ll have a higher net income and your current assets will be overstated. 

Inaccurately reported income will also affect the retained earnings listed on the balance sheet. 

Either instance will give you misinformation about your company’s performance and will cause more problems if the errors aren’t resolved and carry over from one year to the next.

The good news is that you can usually resolve any inventory errors by doing a physical count. It’s why most companies do at least one count a year, right before their fiscal year-end. 

But your physical count must be done properly. While the job may seem like a waste of time (especially to employees may not understand why it’s so important) it needs to be done with care and precision. 

Once you have done a physical count you will need to identify the source of the errors, so that the same errors don’t keep happening. You’ll also have to make adjustments to your inventory accounts to correct your COGS and financial statements. 

If you would like help getting your inventory records in order, contact our team today. We understand the importance of a proper inventory count and will make sure it’s done right. That way you’ll have a clear picture of how your dealership or service shop is performing so you can make the right decisions for the future. 

By Mike Bachara

Mike Bachara | Owner of Pro Count West
Mike Bachara | President Pro Count West

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