Normally we have a guest post on Thursday, and, indeed, we have several scheduled already for the new year: Jake L Jordan next week and Brian Schachtner the following week. Since today is December 31st, though, I decided to use this as a reminder for people to print their end of year reports for FBA.
Technically, the Amazon calendar year ends at 11:59:59pm PST on December 31st, but if you’re on the East Coast, you don’t need to wait up until 3am to print it. What you do need, though, is a pretty good estimate for your inventory at the end of the year. The really key report to run today is the Amazon Fulfilled Inventory Report. The reason it is important is because it is a real time (or close to it) snapshot of the inventory currently warehouse in Amazon FBA warehouses. As this changes with sales, incoming shipments, etc., it’s important that this snapshot be taken at the correct time.
For a nice summary of how to download this report, as well as information on a few other helpful reports, let me refer you to this article by Stephen Smotherman. As he says, it isn’t important that you print the document (in fact, it is prohibitively long for most people), but is important that you download it.
FOLLOWING is some Nerdiness that is NOT essential reading. Please DO NOT get lost in the minutiae. Please DO make sure you print your Amazon Fulfilled Inventory Report. Furthermore, the following is my NON-PROFESSIONAL understanding. There are things in business that you can handle on your own and there are things with which you should seek professional advice. Taxes and accounting should fall into the latter category.
If you want to know why this snapshot is important, here is the formula for calculating the COST OF GOODS SOLD:
Beginning Inventory + Net Purchases* – Ending Inventory = COGS
(Net purchases = Purchases + freight in – discounts – credits – returns)
I start with 0 apples. I buy 5 apples at $0.50 each. I end up with 1 apple.
COGS = 0 + 2.50 – .50 = $2.00.
Seems simple enough when you’re dealing with a few apples, but it gets quite a bit more complicated than that, and it is one reason why I advise that people use a CPA. However, for your CPA to do his or her job, it’s important that they have access to your Beginning Inventory and Ending Inventory. As long as you always print out this report, you’ll always have a snapshot of the beginning and ending inventory.
A second step is correctly determining the value of that inventory. Again, this is easy in our example where I paid fifty cents for each apple, but it can get more complicated if I paid a different amount of each apple. Suppose the first apple was $.50, the next two were $.75, and the final two apples were buy one get one free at $.50. In our COGS formula we’d start with 0 + $2.50, but how much would we subtract for the 1 apple still remaining?
There are at least 3 ways to calculate the answer, and it depends on which method you use: Last in, First out (LIFO), First in, First out (FIFO), and Weighted Average Cost (WAC). As long as you’re consistent, it is my understanding that any is acceptable, but consistency is important.
If you happen to use Inventory Lab, they make obtaining this information fairly easy: Click Reports and then click Inventory Valuation. If you don’t do this on the 31st, you’ll want to set the date for the 12/31 when you do run it (again, we want an end of year snapshot).