How are CoGS Reports Calculated?

[RMLATL]

The title of this thread has been edited by a Square Moderator from the original: "Inaccurate Cost of Goods Reporting"

Our COGS report is not accurately reporting the profit. We have a retail business in which we receive merchandise BEFORE the final invoices are sent in to us. When we receive the items we create the item in the system and start selling them before we have a final cost per unit. Once we receive those final invoices from the vendors we go back in at the item level to add in the cost. (At which point we have sold most of the inventory.) But is seems that the COGS report is not updating the cost for those items that were sold prior to entering the cost. It shows a 100% profit.

Is there a solution to this so our COGS report is accurate? Is there a way to create a custom report to show the up to date information? I would like to see a report that can accurately calculate how much we sold (revenue), how much it cost, and the profit we made. 

[TwinkleToes · Accepted solution]

Hi @RMLATL,

Square uses the First-In / First-Out (FIFO) methodology to determine COGS. The Unit Cost is recorded at the time inventory is received. The Item and Variation Unit Cost values are basically defaults for the next time the item is either placed on a purchase order or when receiving inventory via a Manage Stock transaction. This means you need to specify the unit cost at the time you are receiving inventory so that it handles situations where the item is purchased at different costs.

FIFO is used so that the total cost of sales will offset the total cost of inventory when it was received.

For example:

• 5 initial units of an item are purchased at $1.00 each for a total of $5.00
• At a later point in time, 10 more units are purchased but the vendor's cost has gone up to $1.20 each for a total of $12.00
• Square will use a COGS of $1.00 for the first 5 units sold and will then use a COGS for $1.20 for the remaining 10 units.
• The total cost of sales $17.00 will match the total purchasing cost when all items have been sold
• Note: inventory reduction transactions for damage, theft, etc. will also use FIFO to determine which cost to associate the transaction with

In the above example, if the COGS was based on the most recent purchase, it would be reported as $18.00 (15 x $1.20), which would be more than you actually purchased the items for. Maintaining your inventory asset's value in your financial software (QuickBooks for example) would now be showing that you have a (-1.00) balance instead of the sales value correctly offsetting the purchase value.

The Unit Cost values on the Item and Variations will be set to the last value used when receiving inventory.

If your items are never purchased at different amounts, then you could export your item library and your item sales summary. From the item sales summary, use spreadsheet look-up functionality to pull the current unit cost from your item library export. The COGS can then be calculated and compared with the sales values already populated on the item sales summary.

Hopefully you can somehow identify the cost from your vendor at the time you are receiving the product so that Square will handle all of this for you.

[COGatConnoq]

If I entered item cost after I sold an item, can I still generate a COGS report?

We are a non-profit with only a few days of sales/year. So over Labor Day weekend we ran our food concessions, and I didn't have the item cost entered until after the event.

I ran a COGS report, and it came back as profit for all items,  profit margin showing at 100%.