Inventory Profit Margin gives incorrect results for written stock options

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I am a professional accountant and I am using the inventory functionality to account for investing activity (buying/selling stocks, options etc).

Background info: A call stock option is a contract where the seller of the option agrees to deliver stocks at a specified price at any time during a specified time period. If the market price on the last day of the option is above the strike price of the option, then the option is exercised and stocks are delivered to a purchaser at the specified price. If the market price is below the strike price of the option, then the option expires worthless. A seller of the option is also able to buy identical options from someone else in order to close out their obligation to deliver the stocks.

I am accounting for the following stock option transaction:

Option sold (written) on Dec 15, 2020 for $1,000.00
Same option is then bought on Jan 15, 2021 for $700.00

Note that the sale takes place BEFORE the purchase! When both of the above transactions are recorded in Manager, a profit margin report covering the period Jan 1, 2020 to Dec 31, 2020 will actually show the “Sales” of $1,000 and “Cost of Sales” of $700 and corresponding profit of $300.00. It is important to note that the Profit and Loss statement does not do that and only shows $1,000 profit, and therefore there is a discrepancy in the amount shown on the profit margin report v.s. the profit and loss statement of $700.00. In Canada, the correct treatment is to report $1,000.00 as profit, and then next year, when the option is purchased, to report a loss of $700.00 - just as shown on the profit and loss statement, but not as shown on the profit margin report.

It appears to me that the cost of sales on the profit margin report takes all transactions in the database for that particular inventory item, disregarding the dates. The correct treatment would be to consider only those transactions up to the profit margin report end date and not beyond that date.

I hope you agree and will provide a fix!

1 Like
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What manager does is automatically matching expenses to revenues which is good but it appears that inventory items are being used by users like you @slavaf2000 to solve more complex problems like stock of financial instruments, which is neat.

Now I am not in favor of having a separate tab for each niche workflow, but I do believe that the user should be given more freedom to set-up and possibly adapt some of the modules (“tabs”) to suit their own purposes and specific needs.

I would really like to see this in ideas.
What do you guys think? @lubos @Tut @Brucanna @Abeiku

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My opinion is that @slavaf2000 is using the Inventory Profit Margin report for something it was not designed to do. The report is based on the difference between sales prices for inventory items and average cost of the items on the dates sold. When an inventory item is not in stock on the sale date, it has no average cost, so rather than show a 100% profit margin, Manager waits until additional units are acquired to complete the sale and related posting to Inventory - cost. Meanwhile, you will get fluctuating profit margin calculations, depending on when the report is created — not just the covered period.

@slavaf2000 is trying to track profitability of a specific contract, and Manager’s average cost inventory valuation method is not suitable for that. In fact, while many users have cobbled together various approaches for accounting for securities trading, Manager is really not suitable for that purpose to begin with.

If investing activity is a principal business area, I suggest finding more appropriate software.

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Inventory items are not suitable to record investments. There is new tab coming this year for this purpose however it won’t include support for option contracts. So let’s just wait for this new tab to appear, then we can figure out how option contracts fit in.

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Fantastic, thank you so much!