I am thinking about acquiring an S-corp in California. After looking at their 1120S, I am concerned about their inventory accounting.

Although the COGS are accurate, the amount of Inventory listed is much lower than it should be. Because Inventory is listed too low, the amount of Purchases listed is much higher than it should be.

To summarize, COGS are accurate, but because Inventory is listed too low, Purchases are forced to be higher - so both the Inventory amounts & Purchases amounts are inaccurate.

What steps can I take to fix this once I acquire the S-corp?

To summarize, COGS are accurate, but because Inventory is listed too low, Purchases are forced to be higher - so both the Inventory amounts & Purchases amounts are inaccurate. ========>your COGS are accurate even though your purchases are overstated and inventory is understated since the equation makes perfect sense when you look at it piece by piece.Beginning inventory understated, plus the overstated amount of inventory purchased over the period gives you the total amount of inventory that could have been sold (sometimes known, understandably, as Cost of Goods Available for Sale).
You, regardless of accounting methods, FIFO,LIFO, specific identication method, then assume that, if an item isn?t in inventory at the end of the period, it must have been sold. (And conversely, if an item is in ending inventory, it obviously wasn?t sold, hence the subtraction of the ending inventory balance when calculating COGS). I mean if you apply LIFo then your COGS ishigher than FIFO and lower tax liability for fifo vice cersa.


What steps can I take to fix this once I acquire the S-corp?====>>> if the information is inaccurate, the ability of the system to provide high availability of products at the minimal operating cost can be compromised. Mistakes due to errors in arithmetic, poor estimates, or carelessness usually require adjusting, corrective entries. as the error is detected,you can check JE for the error as you can just reverse it;if it is prior period then you need to go back and correct prior periods inorder to correct current FS . and also you need to correct it on your 1120S.

Thank you so much for the quick reply, I really appreciate it. My concern is, how do I go about correcting the inaccurate inventory on the 1120S after I acquire the S-corp?

For example, let?s say the inventory is listed at $20K. However, after counting up everything, I find that the actual inventory is $40K.

How do I change the inventory from $20K to $40K on the 1120S without causing a lot of issues? I assume I will need to update both the Balance Sheet and 1125-A form.

- If I update the Balance Sheet (Schedule L) with the new inventory amount, the balance sheet will not balance properly - the bottom portion of it will be off by $20K.

- If I update the 1125-A with the new inventory amount, this will also not balance properly, because how/where do I account for the additional $20K in inventory?

Thank you in advance for your answer.

How do I change the inventory from $20K to $40K on the 1120S without causing a lot of issues? I assume I will need to update both the Balance Sheet and 1125-A form.=====>correct after making correcting entries, which are used to correct an error. A reclassification is a correction entry used to correct a mis-classification or to change the classification of an entry. If Journal Entries have been posted to the inventory account, the Inventory Valuation Summary will not agree with the Inventory Asset balance on your Balance Sheet. Also,For form 1125A, you need to use an accrual method of accounting for sales and purchases of inventory item on form 1125A line 1 and 2. If there is a difference between last year's closing inventory and the refigured amount, you need to attach an explanation.


Additionally, inventory items with Quantity On Hand that have been made inactive will also cause a discrepancy between the Inventory Valuation Summary report and the totals for the inventory asset account on the financial statements or trial balance.




- If I update the Balance Sheet (Schedule L) with the new inventory amount, the balance sheet will not balance properly - the bottom portion of it will be off by $20K. - If I update the 1125-A with the new inventory amount, this will also not balance properly, because how/where do I account for the additional $20K in inventory?===>> The Sch L is book-basis, which means that it should exactly match your company's accounting records.i am not sure where the problem occurs;however, you mught go through the balance sheet and tick off the items that you know are correct. For example, your cash balance will be easy to tie out to your bank statement so check that. Your payables balance should match your records.in general, it's usually retained earnings. Youmay look at last year's schedule, and take that ending balance, add your net income and that should be this year's retained earnings. you may contact a tax pro,i.e., IRS enrolled agent/a CPA in your local area for professional help.

Thank you again for the quick reply. Please allow me to clarify two questions:

Using the example that inventory needs to be refigured from $20K to $40K on the 1120S, two questions come to mind:

1 - You mentioned on 1125A that I could refigure the inventory amount from $20K to $40K. And, I could do so by attaching an explanation. However, how would the math work? For example:

- Starting Inventory: $20K
- Purchases: X
- COGS: X
- Ending Inventory: $40K

I can?t just simply change the inventory from $20K to $40K without having additional Purchases, correct? There needs to be something in the math (not just the explanation) that accounts for how an additional $20K worth of inventory just showed up. On the 1125A, additional Inventory typically shows up via additional Purchases.

2 - Regarding Sch L Balance Sheet, there would also be a math problem here. Beginning Inventory would be listed at $20K and I would refigure, so the Ending Inventory would be listed at $40K. Again, this leads to a math issue, because the balance sheet always has to balance. There needs to be something in the math (not just the explanation) that accounts for how an additional $20K worth of inventory just showed up.

On the Sch L, additional Inventory needs to typically be balanced by either one of two things:

- Either Cash goes down (to account for buying additional inventory).

- Or, Accounts Payable goes up (to account for owing money for getting additional inventory)

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To Summarize - Yes, I could refigure the incorrect inventory amount ($20K) to the correct inventory amount ($40K). However, on both the 1125A and the Sch L, the additional $20K inventory cannot simply just show up without there being something in the math to account for it. On the 1125A, additional inventory is typically accounted for by additional purchases. And, on the Sch L, additional inventory is typically accounted for by either a decrease in cash or an increase in accounts payable.

How can I solve the 1125A and Sch L issues when refiguring the incorrect inventory amount ($20K) to the correct inventory amount ($40K)?

Thank you again in advance for your answer.