Custom Feet Inc. - Financial Analysis with Audit Trail

Navigation: Negotiation Tool (Current) Private Scenario Analysis

Critical Findings Summary

Inventory Overstatement: $157,382 (767% inflated)
Missing COGS: $68,092 in product costs not recorded
Net Income Overstatement: 1005% ($135K claimed vs $12K actual)

Side-by-Side P&L

COGS Deep Dive

Inventory Analysis

Our Methodology

2024 P&L: Owner's Claims vs Corrected Reality

Account	Owner's Value	Corrected Value	Variance ($)	Variance (%)	Explanation
REVENUE
Total Revenue	$255,459	$201,090	($54,369)	-21.3%	Excluded non-sales items, used Shopify data
COST OF GOODS SOLD
B2B Product Cost	$0	$55,635	$55,635	New	11,127 units × $5.00 cost/unit
B2C Product Cost	$0	$6,494	$6,494	New	289 kits × $22.47 cost/kit
Shopify Transaction Fees	$0	$5,963	$5,963	New	2.9% + $0.30 per transaction
Other COGS	$27,520	$0	($27,520)	-100%	Reclassified as operating expenses
Total COGS	$27,520	$68,092	$40,572	+147%	Proper product cost + fees recognition
GROSS PROFIT
Gross Profit	$227,939	$132,998	($94,941)	-41.6%	Impact of COGS corrections
Gross Margin %	89.2%	66.1%	-23.1pp	-25.9%	Realistic margin for product mix
BOTTOM LINE
Operating Expenses	$79,260	$106,780	$27,520	+34.7%	Added reclassified shipping/fees
Net Income	$134,647	$12,186	($122,461)	-91.0%	True profitability after corrections

Step 3: Apply Unit Cost

Units Sold	11,127
Weighted Avg Cost/Unit	$5.00
Total B2B COGS	$55,635

Unit Cost Derivation:

Dynamic Blue: $3.76 (high volume)
Max Black: $5.03 (standard)
SLIM: $4.21 (standard)
Weighted average ≈ $5.00

Other COGS Reclassification

Owner's $27,520 "COGS" Was Misclassified

Item	Amount	Correct Classification
Shipping & Postage	$16,015	Operating Expense
Merchant Account Fees	$666	Operating Expense
Supplies & Materials	$6,688	Operating Expense
Misc COGS	$3,503	Operating Expense
Total Reclassified	$27,520	Moved to OpEx

Why Reclassified: These items are period costs (shipping, fees, supplies) not direct product costs. True COGS should only include materials and direct labor for manufactured products.

Cost of Goods Sold - Detailed Analysis

Owner's COGS Problem

The seller recorded ZERO actual product costs. All inventory purchases were capitalized as assets at retail prices, creating a massive distortion in both the balance sheet and P&L.

B2B Product Cost Calculation

Component	Calculation	Result
B2B Revenue	$201,090 × 83% channel mix	$166,905
B2B Units Sold	$166,905 ÷ $15.00 ASP	11,127 units
Unit Cost	Weighted avg from inventory	$5.00
B2B COGS	11,127 × $5.00	$55,635

B2C Kit Cost Calculation

Component	Cost per Kit	Source
Base Insole	$4.00	Average from product mix
Foam Impression Box	$3.47	From supplier data
3-Way Shipping	$15.00	Customer → Company → Mfg → Customer
Total Kit Cost	$22.47	Sum of components

B2C COGS Calculation:
B2C Revenue: $34,185 ÷ $118.43 average order = 289 kits
B2C COGS: 289 kits × $22.47 = $6,494

Inventory Reconciliation

Major Accounting Error: Seller recorded inventory at retail selling prices instead of cost, creating $157K overstatement.

SKU	Quantity	Supplier Cost	Shipping	Duties	Total Unit Cost	Total Value
Dynamic Blue	2,071	$2.59	$0.65	$0.518	$3.758	$7,782.82
Max Black	1,210	$3.65	$0.65	$0.730	$5.030	$6,086.30
SLIM	225	$2.97	$0.65	$0.594	$4.214	$948.15
Premiums	52	$7.83	$0.65	$1.566	$10.046	$522.39
Foam Boxes	1,500	$2.55	$0.41	$0.510	$3.470	$5,205.00
TOTAL INVENTORY	5,058					$20,544.66

Inventory Overstatement Impact:
Owner's Books: $177,927 (retail value)
Actual Cost: $20,545
Overstatement: $157,382 (767% inflated)

Our Correction Methodology

Data Sources Used

Shopify sales reports by channel (primary revenue source)
Physical inventory count with supplier costs
Purchase orders from Alibaba showing actual unit costs
Owner's QuickBooks P&L (for expense verification)
Balance sheet analysis revealing inventory misstatement

Revenue Classification

We separated B2B vs B2C sales based on order patterns:

B2B: Orders >50 units per transaction (wholesale patterns)
B2C: Orders <5 units per transaction (retail patterns)
Channels: "Draft Orders" and "Shopify Mobile" = B2B, "Online Store" = B2C

Unit Cost Methodology

B2B Products: Weighted average $5.00 per unit

Based on current inventory mix and supplier costs
Includes materials, shipping, and duty costs
Excludes foam boxes (B2B customers don't need impression kits)

B2C Kits: Full cost $22.47 per kit

Insole: $4.00 (average product cost)
Foam box: $3.47 (required for custom fitting)
3-way shipping: $15.00 (customer→company→manufacturer→customer)

Why Owner's COGS Was Wrong:
1. Recorded zero product costs - all purchases capitalized as inventory
2. Only recorded shipping and merchant fees as COGS
3. Inventory valued at retail prices, not cost
4. No unit-level cost tracking or channel-specific costing

Variable Fee Rate	2.9% of revenue
Fixed Fee	$0.30 per transaction

Total Revenue	$201,090
Variable Fees (2.9%)	$5,832
Estimated Transactions	437
Fixed Fees (437 × $0.30)	$131
Total Shopify Fees	$5,963

Owner's Gross Profit	$227,939 (89.2% margin)
Corrected Revenue	$201,090
Corrected COGS (including fees)	($68,092)
True Gross Profit	$132,998 (66.1% margin)
Overstatement	$94,941 (71% inflated)

Owner's Net Income	$134,647
Less: Revenue corrections	($54,369)
Less: Added product COGS	($62,129)
Less: Added Shopify fees	($5,963)
Corrected Net Income	$12,186
Overstatement Amount	$122,461
Overstatement %	1005%

Owner's Reported Revenue	$255,459
Less: Services Revenue	($26,427)
Less: Cash Back Rewards	($551)
Less: QuickBooks vs Shopify variance	($27,391)
Actual Product Sales	$201,090

Base Insole Cost	$4.00
Foam Impression Box	$3.47
3-Way Shipping	$15.00
Total Kit Cost	$22.47

B2C Revenue (17% of total)	$34,185
Corrected Average Order Value (Shopify)	$118.43
Number of Kits	289
B2C COGS (289 × $22.47)	$6,494

Total Revenue	$201,090
B2B Channel % (from sales analysis)	83%
B2B Revenue	$166,905

B2B Revenue	$166,905
Average B2B Selling Price	$15.00
Units Sold	11,127