Module 6 — Inventory, cost of goods sold and landed cost

Level: Intermediate · Duration: 5 hours · Tracks: 🔵 🟣 · Prerequisite: Module 4

1. Objectives

By the end of this module you will be able to:

1. Calculate the landed cost of any shipment and spread it across the items using three different allocation bases.
2. Apply both FIFO and weighted average, and measure what each one does to profit and to inventory.
3. Tell a perpetual inventory system from a periodic one and pick the right one for the stage your store is at.
4. Handle returns, damage, shrinkage and consignment goods with the correct entries.
5. Calculate inventory turnover and inventory days, identify dead stock, and put a figure on the cash trapped inside it.

2. Core concepts

2.1 Landed cost — the number most founders get wrong

Landed cost = everything you spent to get the goods ready for sale in your warehouse.

The dividing rule: everything spent before the goods are ready for sale where they stand = inventory cost (an asset). Everything spent after that = an operating expense.

Nuwa's example:

The gap between 60 and 69 is 15%. A store pricing off 60 thinks its margin is 66.9% when it is 65.3% — and worse: during a sale it sells at a loss while believing it is making money.

2.2 Allocating landed cost across several items

When a shipment holds different items, you have to choose an allocation basis:

The common mistake: lazily spreading every cost on one single basis. The result: you think the light expensive item is a loser and the heavy cheap item is a winner — so you stop selling the one that actually makes money.

An allocation example: a shipment with two items, freight 8,000 and customs 5,000.

Landed cost: A = 35,000 · B = 28,000. Had you spread everything by value, A would be 37,800 and B 25,200 — a 2,800 dirham distortion running in two opposite directions.

2.3 FIFO versus weighted average

Both are acceptable under international standards. LIFO is not allowed.

The consistency rule: pick a method and stick to it. Switching between periods makes comparing your own profits meaningless, and calls for disclosure and justification.

2.4 Perpetual versus periodic

Recommendation: any e-commerce store on a platform (Shopify/WooCommerce) already has a perpetual system inside the platform. Use it — periodic means you have no idea what your profitability is for 29 days out of every 30.

2.5 Shrinkage, damage and returns

2.6 Inventory metrics

inventory turnover = cost of goods sold ÷ average inventory
inventory days = 365 ÷ turnover
cash trapped in dead stock = quantity of items with no movement for 90 days × their landed cost

3. Worked examples

Example 1 — Nuwa's inventory entries, January

On the sale (perpetual system) — 500 units × 69:

31 January 2026 | JE-016 | Ref: inventory movement report JAN
   Dr 5010 Cost of Goods Sold                     34,500.00
        Cr 1200 Inventory                              34,500.00
   Memo: cost of 500 units sold during January @ 69 landed cost

On the return of 20 undamaged units:

31 January 2026 | JE-017 | Ref: returns reports RET-JAN
   Dr 1200 Inventory                               1,380.00
        Cr 5010 Cost of Goods Sold                      1,380.00
   Memo: 20 undamaged units returned to inventory @ 69

The result: net cost of goods sold = 34,500 − 1,380 = 33,120 = 480 net units × 69 ✓
Inventory: 1,000 − 500 + 20 = 520 units × 69 = 35,880 ✓

Watch out: the return entry in Module 2 dealt with revenue and tax. This entry deals with cost and inventory. A return is always two entries — forgetting the second one inflates your cost and hides inventory you actually have.

Example 2 — FIFO versus weighted average

Nuwa imported a second shipment in February: 800 units at a landed cost of 74 per unit (the supplier's price and the freight both went up). February sales: 700 units. Opening inventory: 520 units @ 69.

Under FIFO:

Under weighted average:

average = (520×69 + 800×74) ÷ (520 + 800)
        = (35,880 + 59,200) ÷ 1,320
        = 95,080 ÷ 1,320 = 72.03 per unit

The comparison:

The lesson: the difference is not real profit — it is timing. FIFO showed a higher profit in February, and it will show a lower one later, when the expensive units get sold. Over the life of the goods the total is the same. But in your first year, that timing is what decides your tax liability and your pricing decision.

Example 3 — the physical count found a shortfall

The physical count on 31 January showed 515 units instead of 520 in the books. The shrinkage is 5 units × 69 = 345:

31 January 2026 | JE-018 | Ref: physical count record PI-JAN-2026
   Dr 5020 Inventory Variances and Damage            345.00
        Cr 1200 Inventory                                 345.00
   Memo: adjustment for the physical count difference — 5 units

Watch out: shrinkage may require an input tax adjustment if it was caused by damage or theft (Module 8). And do not deal with the differences through a silent entry every month — a recurring difference is a flaw in the operation, not in the books.

4. Exercises

E6.1 — Landed cost (beginner). A shipment: 600 units at 82 per unit, sea freight 7,200, customs 5% of the value of the goods, clearance 1,500, insurance 900, warehouse storage after arrival 2,000. Calculate the landed cost per unit, and say which item you excluded and why.

E6.2 — Multi-item allocation (intermediate). A shipment with three items:

Freight is 9,000 (allocated by weight) and customs 4,800 (allocated by value). Calculate the landed cost for each item and per unit, then redo it spreading everything by value, and compare the distortion on item C specifically.

E6.3 — FIFO and average (intermediate). The movement of one item over the quarter:

Calculate cost of goods sold and ending inventory under both methods, and say in one line which method gives the higher profit and why.

E6.4 — Returns and damage (intermediate). During April: sales of 900 units at a cost of 69, 40 units returned, of which 28 are undamaged and 12 are damaged and unsellable. Write every entry required (revenue and cost), and calculate the net cost of goods sold and the inventory added back.

E6.5 — Dead stock (intermediate→advanced). The year-end count:

Cost of goods sold for the year is 620,000 and average inventory is 88,000.
(a) Calculate turnover and inventory days. (b) Identify the dead stock (no movement > 90 days) and the cash trapped in it. (c) Propose three actions ordered by how fast they release cash. (d) Do you need to write the dead stock down? When does that become an accounting obligation?

5. Mini project — "A complete inventory system"

Deliverable: an inventory file with three linked sheets.

What is required:

1. A shipments sheet: for each shipment, its line items, its additional costs, and the allocation basis for each cost, producing the landed cost of every item automatically.
2. An inventory movement sheet: in/out/returns/shrinkage for each item, with a running balance in both quantity and value.
3. A metrics sheet: turnover, inventory days, dead stock, trapped cash, and an alert for any item with no movement for > 90 days.
4. Apply both methods to the same data in two adjacent columns, and write a paragraph: which one would you pick for your store and why — with an operational argument, not a theoretical one.
5. Add a "physical count" test: a cell where you enter the actual count, so the file works out the difference and proposes the adjusting entry.

Acceptance criteria:
- [ ] The landed cost per unit in the Nuwa example is exactly 69.00.
- [ ] Both methods are applied and give results consistent with E6.3.
- [ ] Inventory balance in quantity × cost = value, on every row without exception.
- [ ] The dead stock alert fires when you change the last-sale date.
- [ ] The method-choice paragraph names one specific operational reason (expiry, price volatility, number of SKUs...).

6. The test

9 questions · pass 7/9.

7. Completion standard

Mastery level (optional): calculate the real landed cost of the last shipment you actually imported — with every item in it, including exchange rate differences and bank transfer fees. Compare it with the cost you had been pricing off. That gap, multiplied by the number of units sold, is profit you thought you made and did not.