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).
It is used in the calculation of the cost of inventory items when a product sale is made.
When calculating the inventory costs for an item sold, FIFO uses the costs of the oldest available inventory to calculate the gross profit or loss on a sale.
Business 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.
The idea is that if you make a large capital purchase, such as a building or equipment, the equipment or building isn’t “used up” in one year. You will use the asset to produce income for several or many years to come.
Depreciation matches up the future income produced by having the equipment with the cost of the current purchase. It also acknowledges that equipment wears out over time.
For example, if you buy a piece of manufacturing equipment for $50,000 you’ll presumably use that equipment for a number of years. So instead of taking the full $50,000 cost as an expense this year, you’ll spread it over several years.
Different types of assets have generally agreed upon “useful lives” and these schedules are used to calculate depreciation.
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.
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.
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.
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.
1. Deductions through payroll withholding.
2. Send a check the IRS with a paper form.
3. Use the EFTPS system to pay from a bank account.
4. Use the IRS Direct Pay system & pay directly from your bank account.
5. Use a credit card (there are fees charged for this option).
Additional options, include wire transfers & setting up a payment agreement if you can’t pay in full. More details about making tax payments are available on the IRS website.
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