Frequently Asked Questions

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LIFO inventory valuationLIFO stands for Last In First Out. It affects the calculation of the gross profit on inventory items when a sale is made.

When calculating the inventory costs for an item sold, LIFO uses the values of the latest inventory acquired to calculate the profit on the sale.

The alternative to using LIFO is to use FIFO (First in First Out).

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KPI or Key Performance Indicator as ConceptKPI stands for Key Performance Indicator. They are quantifiable business data metrics that are used to show how well a business is or is not performing.

Examples of KPIs are customer retention statistics, net revenue, revenue growth, profit margins, etc.

KPIs differ from business to business, but they are a proven way to evaluate & track performance & productivity.

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Current Assets - adhesive label pinned on bulletin board - horizontal image

Assets that are convertible into cash within 12 months are generally considered the Current Assets of a business.

Examples of typical Current Assets are:

• Cash on Hand
• Accounts Receivable
• Inventory

Current Assets are enumerated on the Balance Sheet.

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Category: Accounting

GAAP-accountingThe abbreviation stands for Generally Accepted Accounting Principles. Accountants use these standards to prepare financial statements and conduct audits.

GAAP standards cover all areas of financial statement preparation, including when and how to recognize revenue, inventory valuation methods, disclosures, capitalization of expenditures, etc.

This wide ranging set of standards insures that financial statements are easily compared and give investors and business owners a relative sense of security that the statements accurately reflect the business’ true financial results.

Financial Statements for publically held companies are always prepared according to GAAP standards.

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Working capital words highlighted on the white backgroundBusiness Working Capital is calculated using Balance Sheet accounts. By subtracting Current Liabilities from Current Assets you can easily see the amount of cash or cash equivalents (assets that can quickly be converted to cash) you have available to run your business.

The formula is:

Current Liabilities – Current Assets = Working Capital

Working Capital is an indicator of your business’ liquidity and overall health. A situation where Current Liabilities exceed Current Assets is a red flag that your business is heading for a cash flow or liquidity problem.

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calculating amortizationAmortization, like depreciation, is a way to write off the expense of an asset over several years.

As examples, Amortization can be applied to intangible items, such as, “Goodwill” on the Balance Sheet or for spreading the costs of tangible expenses related to start-up costs over time.

Different write-off time periods are used for different types of assets.

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Balance Sheet Goodwill valueGoodwill is an Intangible Asset that is shown on the Balance Sheet during the purchase or valuation of a business.

Goodwill is amortized over a set period of years, similarly to depreciation.

Goodwill from an accounting standpoint is the value placed on intangible company assets such as reputation or customer list value. Intangibles are non physical items (e.g., copyrights or patents) that are expected to support future business earnings.

Goodwill value, when added to the Book Value of a company’s assets, will usually increase the actual purchase price of the company.

When selling a company, the dollar amount assigned to Goodwill is usually subject to significant negotiation.

Different industries have different types of intangible assets that will affect the purchase price of a business.

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The term boxes stacked up solated over a white backgroundinventory covers the goods or items you have available for sale.

The value of your Inventory will be found on your Balance Sheet in the Asset section.

Inventory can be finished goods ready for sale, e.g. a bottle of perfume, packaged & ready to ship.

It can also include the materials that will make up your finished goods, e.g., the bottle, the box, the labels, and the fragrance oils.

How you value your inventory will affect your profits and your taxes.

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cost of goods soldThe term COG or Cost of Goods Sold represents the actual cost of manufacturing or producing the goods you sell.

It does not reflect operating costs such as advertising or marketing.

It is strictly the cost of all items required to create your finished product, including the cost of “freight in” to get the raw materials or parts to your business.

It is also referred to as the Cost of Sales.

Your COG & how you value your inventory will affect your profits and taxes.

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