You recently ran into Bill Autograph, a friend from high school who has been really busy
getting his sports collectible/memorabilia business off the ground. When he heard you
were an accountant, he became very interested and wanted you to clarify something.
One concept he seemed particularly confused about was the fact that when inventory is
purchased, it is recorded on the books at cost but the books are not adjusted for
subsequent increases in the value of the inventory. This concept is of particular
importance to Bill because he often buys collectibles that will increase in value depending
on how successful a particular player or team becomes. Can he record increases in the
value of his sports memorabilia inventory?
2007-09-06 07:37:41 · 3 answers · asked by kitten 1 in Business & Finance ➔ Other - Business & Finance
He could, but this would be terribly stupid move from the tax stand point. Since, the increase in the inventory would be recorded as income and therefore be taxable. No one does that. That is exactly the same situation as with any other asset.
Say a company purchased a building for 1,000,000 dollars. As long as they hold the building they will be depreciating it, actually recording a loss due to depreciation in value, when in fact it is not uncommon for the building to increase in value.
But that increase will be recognized as Capital Gain at the time when the asset is sold.
If your friend attempts to record income due to value increase, he will also have a terrible cash flow problems, as he will be responsible for income taxes for non-cash income item.
In general if not always, no one wants to recognize any appreciation in value until asset is sold.
2007-09-06 08:22:37 · answer #1 · answered by Alexander K 3 · 0⤊ 0⤋
No...inventory is recorded on the books at the lower of cost or market (LCM rule). The only time inventory would not be recorded at cost is when the market value (current cost to replace) drops below the original cost. LCM by item is required by the IRS unless using the LIFO (Last In - First Out) method of inventory valuation, which wouldnt apply to this type of business.
2007-09-06 10:40:27 · answer #2 · answered by mindcrime828 7 · 0⤊ 0⤋
NO - that's where profit comes from, selling at a higher price than he paid. If you increase the cost without declaring income for the increase, you're cheating and you will get audited and fined by the IRS
2007-09-06 08:23:48 · answer #3 · answered by Anonymous · 0⤊ 0⤋