Category Archives: Financial

What’s my inventory worth?

Unless you sell services in your business, you probably have a product you need to keep track of. Whether it is kept in a warehouse, or in your basement, you probably have more pieces around than you care to admit. That is a drawback of having your own product based business.

No matter how much you, or your significant other, like or dislike having a lot of inventory around, you still need to keep track of it, and be able to report on its value at year end when you do your taxes. So what are some ways you can keep track of the value of your inventory.

When to Take Inventory

The first thing to consider is how often you update your inventory records. Do you update them when you make a sale, or wait until the end of the year?

If you wait until the end of the year (or quarter or even month) to count and value your inventory, you are using a periodic system. When you do this, you are taking a count of your inventory at the end of whatever period you choose, and assigning a value to it at that time. You do need to be consistent when you choose at what time interval to count it, and not change it from year to year. This advantage of this method is that you don’t tie up resources keeping up with inventory. The disadvantage is that you run the risk of running out of material because you didn’t know to re-order more stock.

The perpetual system requires you to update inventory after every purchase or sale. The benefit is that you always know how much inventory you have on hand, so being out of stock is no longer a consideration. The disadvantages are that you will have to spend money on a system to keep up with the inventory, and you have to make adjustments in your system for theft and items that are broken or spoiled.

How to Value Inventory

There are a few methods to determine the value of the inventory you have on hand. The first way is called specific identification. As the name implies, each piece of your inventory is specifically identified in your records, and its cost is the amount you paid for it. This is a good method if you have a small number of products that you sell, such as sailboats, but can be a bit cumbersome if you mass produce screws.

The second method to calculate inventory is the First-In-First-Out, or FIFO, method. With this process, it is assumed that the first items you purchased are the first ones sold. If prices are rising, this will give you a lower cost of goods sold and higher profit, as it is assumed that your cheaper items are sold first. Additionally, you will have a higher inventory total since the higher priced goods are what remains in your stock.

The third method is the Last-In-First-Out method. It is assumed that the last items ordered are the ones that are sold first. If your prices are going up, this will lead to a higher cost of goods sold and a lower profit, since you will have sold the more expensive goods first. Your inventory will also be lower, since the cheaper goods will remain in your inventory.

Lastly, you have the Weighted Average method. With this method, you are taking the average of the items you have purchased, plus the value of your beginning inventory, and dividing this sum by the number of items in your inventory. You would then take this number and multiply it by the number of items in your ending inventory. This gives you the value of your ending inventory.

If you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them. If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

Circular 230 Disclosure:  To ensure compliance with requirements imposed by the United States Treasury Department, you are hereby informed that the tax advice contained in this blog post is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local law provisions, or (ii) promoting, marketing, or recommending to another person any transaction or matter addressed in this communication.

 

Why Keep Financial Records?

You are really busy! You spend so much time working on your business that you don’t really have time to keep track of your finances. Why do you even need to bother with this every month? Can’t you just wait until the end of the year and throw a shoe box full of receipts and paper at your accountant and let them just put together the tax return?

There are some advantages to keeping records and using those records to keep track of your finances. Let’s take a look at a few of them.

The first reason is to track revenue. You want to know where your money is coming from. Who are your best clients? What is your best selling product or service? By keeping track of your revenue, you can determine which clients are bringing in the most money, and what offerings are the most popular. With this information, you can determine if a client is worth keeping (by comparing what they pay you to the headaches they may cause you), or if you want to focus on a certain product or service that is bringing in more money.

Second, as you track the money coming in, you also want to be aware of the money going out. By knowing where the money is going, you can analyze your spending and see if what you are spending the money on is bringing in the business you had hoped. Is that new ad campaign bringing in the customers? Is that new transcription service really saving you that much time? Once you look at it in this light, you can determine where your spending habits need to change.

An additional benefit to tracking your expenses is that it will show you if there is someone in your organization who is spending too much, or for things they should have spent money on. Is that new sales rep spending too much money taking potential clients out to expensive dinners? Is your assistant stockpiling office supplies for the zombie revolution? Keeping an eye on what gets spent will make sure you keep more of the money you have earned.

Third, record keeping will allow you to prepare financial statements and tax returns. Preparing financial statements give you an accurate view of your business and how it is doing. Additionally, you may need to have a set of financial statements available to give to your bank, creditors, or even potential customers. Customers may want to look at your financials to make sure you will be in business to fulfill a long-term contract. In addition, by having financial statements, you can readily see if things are getting better or worse for your business, and what changes need to be made.

Keeping good records helps in preparing tax returns in that you will be able to prepare an accurate return to send to the government. In addition, you will have support for the amounts you claimed on the return in case your return is selected for an audit. It makes things much easier if you are able to provide support for an amount on your return.

If you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them. If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

Circular 230 Disclosure:  To ensure compliance with requirements imposed by the United States Treasury Department, you are hereby informed that the tax advice contained in this blog post is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local law provisions, or (ii) promoting, marketing, or recommending to another person any transaction or matter addressed in this communication.