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The SEC staff comments for inventory focused on disclosure in MD&A related to known events, including inflationary pressures, that are reasonably likely to cause a material change as well as disclosure of the basis of accounting for inventory in the financial statements.
For cost of sales, the SEC staff focused on the components of cost of sales, ensuring non-cash items, like depreciation, were allocated to cost of sales, and questioning the calculation of gross margin when it was not.
Comment examples (generalized to identify overarching themes, with specific details pertaining to individual companies omitted)
Guidance references
  • We note from your disclosure that you use the lower of cost (determined using the first-in, first-out method) or market for valuing inventories. Please tell us how your accounting policy is consistent with ASC 330-10-35-1B, which indicates that inventories should be measured at the lower of cost or net realizable value.
  • You present cost of goods sold exclusive of depreciation and amortization expense along with the subtotal, gross profit. Please tell us how your presentation complies with the guidance in SAB Topic 11:B, as gross profit appears to represent a figure for income before depreciation.
  • Please disclose the basis of stating inventories and consider disclosing the major classes of inventories in future filings. Refer to ASC 330-10-50-1 and paragraph 6 of Rule 5-02 of Regulation S-X.
  • Please tell us and disclose in an accounting policy footnote the specific types of amounts included in cost of sales, operating expenses and general and administrative expenses.
  • We note your disclosures related to inventory valuation. Please enhance your critical accounting estimate disclosures to more fully explain the material assumptions you used to estimate reserves, quantify the impact these assumptions had during each period, and discuss the impact potential changes in these assumptions could have on future results.
  • Your disclosure indicates that you have faced significant inflationary forces and that such inflationary pressures are growing and could continue in upcoming quarters. In this regard, please disclose any known trends or uncertainties that have had or are reasonably likely to have a material impact on your cash flows, liquidity, capital resources, cash requirements, financial position, or results of operations arising from, related to, or caused by inflation. Trends or uncertainties may include the combined impact of inflation on cost of sales, gross profit, inventory and taxes. Refer to item 303(b) of Regulation S-K.

PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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