Inventory Adjustments

I'm a city boy, mulch, fertilizer, its all s*it to me.

Then you'd do well to stay in the city ...

So long as the expense is recorded accurately, and the income is recorded accurately, and the amount on hand is valued appropriately......

Why would the IRS give a fig about a variance in the ratio of volume purchased to volume sold?

(Not rhetorical or sarcastic.. I am seriously wondering in what way such a variance would influence taxes)

...

Well, if there's scope for selling 10-20% without reporting it ...

No problem, plenty to step in here as well.

Paul, I assume you are being facetious. Almost all businesses have inventory variances. Managing (and generally minimizing) those variances is (or should be) a primary concern of owners/managers in order to maximize profitability. The same concept applies to non-inventory service-based businesses where the objective is to maximize employees' "billable time". The IRS is certainly aware of the "tax advantages" of unreported income - in ANY business. As L said, IRS "signs off" on good accounting and control procedures. Unusual inventory variances may be one sign of tax fraud, but "large" variances are not necessarily "unusual" and are a natural characteristic of many product-oriented businesses. If you find this so tempting, try the restaurant business where large inventory variances are only slightly more common than bankruptcy.

Well, yes - I'm being facetious about moving into another business. And as I said quite explicitly, this is surprise due to a lack of experience (we're a service business). "Variance" is confusing to me at this point, since I started out in statistics, so I interpret that as a measure of variation in inventory, which isn't what we're talking about here - it's the variation in the relationship between materials purchased for resale and the actual sales, which isn't quite the same as the restaurant business (or, worse still, catering). Anecdotally, we had a good friend who owned a restaurant, and I'll never forget his farewell comment that he wished he'd taken his professor's advice at catering college - "The moment you start losing money, close down - it only ever gets worse!"