Accounting

Inventory value in foreign prepayment scenarios

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I have this client who operates in very specific conditions: majority of their vendors are foreign companies which invoice them in a foreign currency (USD) and almost invariably ask for at least 50% prepayment.

NAV can handle prepayments and foreign currencies like a charm—the issue lies elsewhere: the fluctuations of currency exchange rate can easily cause real and tangible losses.

Even though prepayment invoice is fully closed by a prepayment applied against it, the actual costs of goods is not calculated from prepayment invoice, but from the actual invoice. And if there was difference between currency exchange rate at prepayment and invoicing dates, the inventory value reflects the actual invoiced value (instead of the prepaid value), there is currency exchange gain/loss which is fictitious, but taxable.

Thankfully, there are ways to avoid this.

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Not-so-elementary costing: The Change

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They say the only constant is change. I’d say that the only other constant is error. We humans tend to err. Give a repeatable task to a human, and they’ll mess it up every once in a while. Some call it the human factor.

One of the many repeatable tasks in Microsoft Dynamics NAV is setting up items. If you remember my rant about mandatory fields, and how I said they were baaad, there might be an even more baaad kind of fields: the default value fields. Because the system simply inserts a value into these fields without asking for your say, and if anything is easy, it’s only so easy to overlook these. Yep, you have a chance to voice your oppinion on these, but having got to hurry for a cup of coffe with Mary from accounting, admit it, you’re gonna leave that default FIFO costing method for an item every once in a while, even though it should really have been Average. Then you’ll start posting. Then your phone rings and starts screaming at you about a moron who screwed up items again.

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Purchasing Services: Inventory Value Zero

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I’ve stumbled recently upon a support request, where a partner asked if there was a possibility to register purchases of services in Microsoft Dynamics NAV. When it comes to selling services, such as consulting, or repairs, NAV is your true friend, because you can use Resources to register sales against them. However, purchase documents don’t offer a possibility of purchasing resources, so you are left to some workarounds.

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Elementary costing 3: FIFO, LIFO, UFO…

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Due to fluctuations in market prices, purchase cost of goods may vary from one purchase to another. Also, you rarely just purchase goods and immediately sell them in the same quantity. What you usually do is that you purchase the goods, then let them sit in the inventory for a while, then you may sell five different purchases all at once, or you may sell goods from one purchase to five different customers.

All of these situations have different effects on your inventory value, because something else must be taken into account: cost flow. Regardless of the inventory valuation method you chose, whenever you take an item from the inventory, how do you know its cost? Without knowing its cost, you can’t know the cost of goods sold, so you better know your cost. Don’t tell me you stick the purchase price to each item, so that you can know exactly how much it cost whenever you are about to sell it, because accountants won’t subscribe to the idea.

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Elementary costing 2: Know your costs

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When you buy a sheep, how much is it worth to you, what is its value? For starters, its value is at least what you paid for it, but that’s not quite it. Say you paid a hundred dollars for it. If you want to sell it now, how do you determine your selling price? A hundred-twenty? A hundred-fifty? Obviously, you need to increase the price by some percentage over whatever you paid initially, but regardless of what you increase your price, if you don’t know your true costs, you might be at loss.

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