WAC is a way to value inventory based on how much each tranche contributes to the overall valuation of its cost of goods sold (COGS) and inventory. Recognized by both GAAP and IFRS, it’s determined by taking the cost of goods available for sale and dividing it by the quantity of inventory ready to be sold. It’s important to note that while WAC is a generally accepted accounting principle, it’s not as precise as FIFO or LIFO; however, it is effective at assigning average cost of production to a given product.
It’s done primarily for types of inventories where parts are so intertwined that it makes it problematic to attribute clear-cut expenditures to a particular part. This often happens when stockpiles of parts are indistinguishable from each other. It also accounts for businesses offering their inventory for sale all at once. Here’s a visual representation of the formula:
Weighted Average Cost (WAC) Method Formula
WAC per unit = Cost of goods available for sale / Units available for sale
Costs of goods available for sale is determined by adding new purchases of inventory to the value of what the business already had in its existing stock. Units available for sale is how many saleable items the company possesses. Its value is assessed per item and encompasses starting inventory and additional purchases.
When it comes to calculating WAC, there are two different types of inventory analysis systems: periodic and perpetual.
Periodic Inventory System
In this system, the business tallies its inventory at the end of the accounting period – be it a quarter, half or fiscal year – and analyzes how much the inventory costs. This then determines the value of the remaining inventory. The COGS is then calculated by adding how much starting, final, and additional inventory within the accounting period cost.
Perpetual Inventory System
This system puts a bigger emphasis on more real-time management of its stock levels. The trade-off for such real-time tracking of inventory requires more company financial resources. Looking at an example of how a company began its fiscal year with the following inventory can illustrate how it works.
At the beginning of the year, a company had 1,000 units, costing $50 per unit. It also made three additional inventory purchases going forward.
Jan 20: 75 units costing $100 = $7,500
Feb 17: 150 units costing $150 = $22,500
March 18: 300 units costing $200 = $60,000
During the fiscal year, the business sold:
235 units sold during the last week of February
325 units sold during the last week of March
Looking at the Periodic Inventory System, for the first three months of its fiscal year, the company can determine its COGS and the number of items ready to be sold over the first three months of its fiscal year.
Before calculating for the 325 units sold the last week of March, the unit valuation per WAC is: ($64,652.15 + $60,000) / (1225 – 235 + 300) = 1290 = $96.63
Looking at the 325 units sold during the last week of March is calculated as follows:
Based on these options, businesses have the choice, along with LIFO and FIFO, to decide how they want to vary it based on their own business needs.
Powell CPA PLLC
Understanding the Weighted Average Cost (WAC) Method for Inventory Valuation
January 1, 2023 · Blog, General Business News
⏱ 4 min read
When it comes to businesses and their inventory and accounting methods for managing it, there are a few different ways to approach the task. The three different options to value inventory/implement cost flow assumptions, include: Last In, First Out (LIFO); First In, First Out (FIFO); and Weighted Average Cost Accounting (WAC). This article will focus only on the WAC method.
Weighted Average Cost (WAC) Method
WAC is a way to value inventory based on how much each tranche contributes to the overall valuation of its cost of goods sold (COGS) and inventory. Recognized by both GAAP and IFRS, it’s determined by taking the cost of goods available for sale and dividing it by the quantity of inventory ready to be sold. It’s important to note that while WAC is a generally accepted accounting principle, it’s not as precise as FIFO or LIFO; however, it is effective at assigning average cost of production to a given product.
It’s done primarily for types of inventories where parts are so intertwined that it makes it problematic to attribute clear-cut expenditures to a particular part. This often happens when stockpiles of parts are indistinguishable from each other. It also accounts for businesses offering their inventory for sale all at once. Here’s a visual representation of the formula:
Weighted Average Cost (WAC) Method Formula
WAC per unit = Cost of goods available for sale / Units available for sale
Costs of goods available for sale is determined by adding new purchases of inventory to the value of what the business already had in its existing stock. Units available for sale is how many saleable items the company possesses. Its value is assessed per item and encompasses starting inventory and additional purchases.
When it comes to calculating WAC, there are two different types of inventory analysis systems: periodic and perpetual.
Periodic Inventory System
In this system, the business tallies its inventory at the end of the accounting period – be it a quarter, half or fiscal year – and analyzes how much the inventory costs. This then determines the value of the remaining inventory. The COGS is then calculated by adding how much starting, final, and additional inventory within the accounting period cost.
Perpetual Inventory System
This system puts a bigger emphasis on more real-time management of its stock levels. The trade-off for such real-time tracking of inventory requires more company financial resources. Looking at an example of how a company began its fiscal year with the following inventory can illustrate how it works.
At the beginning of the year, a company had 1,000 units, costing $50 per unit. It also made three additional inventory purchases going forward.
Jan 20: 75 units costing $100 = $7,500
Feb 17: 150 units costing $150 = $22,500
March 18: 300 units costing $200 = $60,000
During the fiscal year, the business sold:
235 units sold during the last week of February
325 units sold during the last week of March
Looking at the Periodic Inventory System, for the first three months of its fiscal year, the company can determine its COGS and the number of items ready to be sold over the first three months of its fiscal year.
Before calculating for the 325 units sold the last week of March, the unit valuation per WAC is: ($64,652.15 + $60,000) / (1225 – 235 + 300) = 1290 = $96.63
Looking at the 325 units sold during the last week of March is calculated as follows:
Based on these options, businesses have the choice, along with LIFO and FIFO, to decide how they want to vary it based on their own business needs.
Disclaimer
These articles provide general information on tax, accounting, and financial topics for small businesses and individuals. They are educational in nature and are not specific legal, accounting, financial, tax, or other professional advice, and should not be relied upon as such. This content was prepared by Service2Client and may have been reviewed or edited by the website owner for accuracy and compliance. Look for a trust mark below for verification details. No representation is made that any approach described will achieve a particular result, and no regulatory or professional body has reviewed or endorsed this content. Because each situation is different, readers should consult a qualified professional about their specific circumstances before acting. Images accompanying these articles are protected by copyright and may not be copied or reused.
Some taxpayers believe that the deduction for charitable donations is no longer applicable to them since it can be hard to make donations large enough to exceed the standard deduction. One strategy to overcome this challenge is to cluster your donations. Instead of making equal gifts every year, consider making more substantial gifts all in one year instead.
When it comes to making donations around year-end, it’s important to understand the rules on timing and when a gift is effectively deemed given for tax purposes. Here are the basic rules on timing of charitable donations.
To give to charity by check => the date the check is mailed
Gifts of stock certificates => when the transfer occurs, according to the issuer’s records
Gifts of stocks by electronic transfer => when the stock is received, according to the issuer’s records
Gifts by credit card => date the charge is made
Conclusion
As we enter the final part of the year, now is the time to take stock of your financial and tax situation to see if there are any moves you can make to minimize your 2022 tax liabilities and maximize your wealth.
Powell CPA PLLC
The 2022 Tax Guide
December 1, 2022 · Blog, Tax and Financial News
⏱ 4 min read
Now is the time of year to do everything you can to minimize taxes and maximize your financial health with proper year-end planning. In this article, we’ll look at several actions to consider taking before the end of 2022.
Thoughtfully Harvest Losses and Gains Before Year-End
Tax loss harvesting by selling securities at a loss to offset capital gains is a classic year-end planning strategy. Just make sure not to violate the wash sale rules. This means you can’t buy back the same security or a substantially identical one within 30 days of the sale.
Reinvest Capital Gains into Opportunity Zones
Another way to offset capital gains is to reinvest those gains into a qualified opportunity fund (QOF). To be eligible, you must make the investment within 180 days of the sale of the asset-bearing gains. QOF investments allow you to defer the recognition of the capital gains tax on the original investment. The details and exact rules can be tricky, so it’s best to check with your tax advisor before making this type of transaction.
Consider Installment Sales Where Applicable
When a taxpayer sells a private asset such as real estate, a business, or private equity in exchange for a series of payments over multiple years through a promissory note, this can constitute an installment sale. Installment sales are generally taxed, with each payment representing a portion of the proceeds; return of basis, interest, and gain are recognized over the life of the note.
There are situations in which installment sales can be structured so that gains are not recognized until principal payments are recouped. If you are considering selling an asset via an installment sale this year-end or next, consult with your tax advisor to determine if it’s possible to structure the sale to defer gains.
Funding Retirement
If you can contribute to a retirement account, now is the time to see if you need to make additional contributions or top-up to the full amount allowable. As you review your situation, keep in mind the annual maximum contribution limits for 2022.
IRAs – $6,000. If you are 50 or older, it’s $7,000.
401(k)s/403(b)s — $20,500. If you are 50 or older, it’s $27,000
Also, converting assets from a traditional IRA to a Roth IRA may be a smart move if: you believe your tax rate will be higher in the future; you can afford to pay the taxes now with spare cash; and you don’t plan to leave the IRA assets to charity.
Take Your Required Minimum Distributions
The annual deadline to take required minimum distributions (RMD) from your own or inherited retirement accounts is Dec. 31, 2022. It’s important to take RMDs because there is a 50 percent penalty on amounts not distributed. The amount needed to be taken were determined on Dec. 31, 2021, even though the value of the investment has likely fluctuated significantly since that time. RMDs are based on a calculation of age and amount of assets. There are online calculators to help you figure out the amount you need to take.
Giving to Charity
Some taxpayers believe that the deduction for charitable donations is no longer applicable to them since it can be hard to make donations large enough to exceed the standard deduction. One strategy to overcome this challenge is to cluster your donations. Instead of making equal gifts every year, consider making more substantial gifts all in one year instead.
When it comes to making donations around year-end, it’s important to understand the rules on timing and when a gift is effectively deemed given for tax purposes. Here are the basic rules on timing of charitable donations.
To give to charity by check => the date the check is mailed
Gifts of stock certificates => when the transfer occurs, according to the issuer’s records
Gifts of stocks by electronic transfer => when the stock is received, according to the issuer’s records
Gifts by credit card => date the charge is made
Conclusion
As we enter the final part of the year, now is the time to take stock of your financial and tax situation to see if there are any moves you can make to minimize your 2022 tax liabilities and maximize your wealth.
Disclaimer
These articles provide general information on tax, accounting, and financial topics for small businesses and individuals. They are educational in nature and are not specific legal, accounting, financial, tax, or other professional advice, and should not be relied upon as such. This content was prepared by Service2Client and may have been reviewed or edited by the website owner for accuracy and compliance. Look for a trust mark below for verification details. No representation is made that any approach described will achieve a particular result, and no regulatory or professional body has reviewed or endorsed this content. Because each situation is different, readers should consult a qualified professional about their specific circumstances before acting. Images accompanying these articles are protected by copyright and may not be copied or reused.
However, many of the 87,000 figures include new hires to replace retiring agents over the next decade. Replacement hires are likely to be the bulk of the new hires, with more than 50% of the agency’s current employees becoming eligible for retirement over the next decade. Furthermore, the funds will not just be for IRS agents but also for IT technicians, taxpayer services support staff, and experienced auditors.
All-in-all, the IRS will be beefing up the number of employees with the new funding; but it will net somewhere between 20,000 – 30,000 new employees of all types. This would bring staffing levels back to where they were a little over a decade ago.
How Many Agents Will Really Be Armed
Related to the rumor of 87,000 new agents is that they will be armed and coming to bust down the doors of millions of Americans as part of stepped-up tax enforcement. Again, reality and news headlines are not lining up.
Collecting taxes can be a dangerous business. It is not just scouring checkbooks and bank records when it comes to tackling drug dealers, terrorists, and money launderers. In addition to forensic accounting, IRS Criminal Investigation Special Agents also work undercover inside criminal organizations.
In fact, they have been doing this for over one hundred years since the Criminal Investigation division (previously called the Intelligence Unit) was created in 1919 with just six agents. Think of taking down Mobsters like Al Capone based on tax fraud in the 1930s.
So, to put it in perspective, the IRS Criminal Investigation (CI) unit only has about 3,000 employees, of which about 2,100 are special agents. Only special agent carries guns.
Even with the new funding previously mentioned, the CI unit is looking to hire around 300-350 new Special Agents in 2022, with about half of that replacing retirees and those who leave the department. In the end, the IRS is only going to gain about 150 or so new gun-wielding agents.
What’s Your Best Defense
Now that you know you will not have an army of armed IRS agents busting down your door, what is your best defense against getting an unexpected bill from the IRS? First, make sure you are dealing with a reputable preparer. Ask for a copy of the practitioner’s license to do business as a tax preparer. Ask your friends for references of reputable CPAs or other tax practitioners.
Finally, review your tax return and ask questions about anything that you do not understand. Reputable preparers take pride in their work and are honest enough to admit when a mistake has been made. Do not be afraid to ask questions for fear of offending your preparer.
Conclusion
Returning to our original question, just who is responsible for your tax return? The simple answer is you are. Good tax preparers realize this and make every attempt to provide you with an accurate return because protecting you is their job. We congratulate you on your wisdom if you have just such a professional. If you are looking for someone who fits that bill, please consider giving us a call.
Powell CPA PLLC
Your Tax Return “Whose Responsibility Is It?” Reboot
December 1, 2022 · Blog, Guest Article of the Month
⏱ 6 min read
This article is not for those of you who prepare your own tax returns. Let us face it, when you prepare your own return, you are responsible for what is or is not included on the forms. What if you have a CPA or other tax practitioner prepare your annual state and federal income tax returns? Who is responsible for the numbers on your Form 1040, then?
Who’s Responsible – You or your Tax Preparer
Many people have the misconception that once you turn over your tax information to a preparer, all you must do is sign the result and mail it in (or electronically file it). Nothing can be farther from the truth. That is not to say the tax preparer has no responsibility for the numbers included in the return. In fact, in Internal Revenue Service Circular 230, the government specifically states that a practitioner must exercise due diligence in preparing a tax filing, including determining the veracity of oral or written client representations. This does not mean a tax preparer must verify everything you tell him, but he or she must be satisfied that the amounts included on a tax return make sense.
The real problem in a case like this is not that additional tax was due, though that was bad enough. The real problem is that the understatement of taxes opens a taxpayer up to both penalties and interest. At a minimum, interest would be due because the IRS cannot, by law, forgive or abate interest. Add to that the potential for penalties on the late payment of income taxes, negligence, or filing of fraudulent returns – and it doesn’t take long for your tax bill to double.
Many times, taxpayers sign their returns and put them in the mail (snail or electronic) without reviewing the numbers. Either they trust the preparer implicitly (even if the numbers look wrong) or they are happy to have the tax return chore out of the way for another year. Whatever the reason, many taxpayers fail to double-check the preparer’s numbers.
Reviewing Your Return
Wait a minute – did you notice the error in that last paragraph? The error is in characterizing amounts on a tax return as the “preparer’s numbers.” Sure, the calculations may come from your CPA’s computer, but those numbers had better be the amounts you provided to your tax accountant. Any good preparer will welcome a second or third set of eyes checking the numbers to make sure the amounts are correct. That is because he or she knows that the taxpayer is ultimately responsible for the amounts included in the return. The preparer makes sure they are in the right place on the return.
Without naming names, there have been many recent cases where taxpayers were held liable for understated taxes plus penalties and interest. Simply put, ignorance of the law, or the numbers, is not considered an excuse for filing false and misleading returns.
An Army of New Agents?
Now that you know your role and responsibility in filing your tax return, the thought of the IRA hiring 87,000 new agents is keeping you up at night. This figure, which is being bandied about in the news, comes from the projected hiring of new agents from the almost $80 billion in new IRS funding over the next decade as part of the Inflation Reduction Act passed this past summer.
The truth is, yes, many new IRS agents will be hired. No, there will not be anywhere near 87,000 of them. The 87,000 figure comes from a Department of Treasury report from May 2021, which estimated the number of new hires.
However, many of the 87,000 figures include new hires to replace retiring agents over the next decade. Replacement hires are likely to be the bulk of the new hires, with more than 50% of the agency’s current employees becoming eligible for retirement over the next decade. Furthermore, the funds will not just be for IRS agents but also for IT technicians, taxpayer services support staff, and experienced auditors.
All-in-all, the IRS will be beefing up the number of employees with the new funding; but it will net somewhere between 20,000 – 30,000 new employees of all types. This would bring staffing levels back to where they were a little over a decade ago.
How Many Agents Will Really Be Armed
Related to the rumor of 87,000 new agents is that they will be armed and coming to bust down the doors of millions of Americans as part of stepped-up tax enforcement. Again, reality and news headlines are not lining up.
Collecting taxes can be a dangerous business. It is not just scouring checkbooks and bank records when it comes to tackling drug dealers, terrorists, and money launderers. In addition to forensic accounting, IRS Criminal Investigation Special Agents also work undercover inside criminal organizations.
In fact, they have been doing this for over one hundred years since the Criminal Investigation division (previously called the Intelligence Unit) was created in 1919 with just six agents. Think of taking down Mobsters like Al Capone based on tax fraud in the 1930s.
So, to put it in perspective, the IRS Criminal Investigation (CI) unit only has about 3,000 employees, of which about 2,100 are special agents. Only special agent carries guns.
Even with the new funding previously mentioned, the CI unit is looking to hire around 300-350 new Special Agents in 2022, with about half of that replacing retirees and those who leave the department. In the end, the IRS is only going to gain about 150 or so new gun-wielding agents.
What’s Your Best Defense
Now that you know you will not have an army of armed IRS agents busting down your door, what is your best defense against getting an unexpected bill from the IRS? First, make sure you are dealing with a reputable preparer. Ask for a copy of the practitioner’s license to do business as a tax preparer. Ask your friends for references of reputable CPAs or other tax practitioners.
Finally, review your tax return and ask questions about anything that you do not understand. Reputable preparers take pride in their work and are honest enough to admit when a mistake has been made. Do not be afraid to ask questions for fear of offending your preparer.
Conclusion
Returning to our original question, just who is responsible for your tax return? The simple answer is you are. Good tax preparers realize this and make every attempt to provide you with an accurate return because protecting you is their job. We congratulate you on your wisdom if you have just such a professional. If you are looking for someone who fits that bill, please consider giving us a call.
Disclaimer
These articles provide general information on tax, accounting, and financial topics for small businesses and individuals. They are educational in nature and are not specific legal, accounting, financial, tax, or other professional advice, and should not be relied upon as such. This content was prepared by Service2Client and may have been reviewed or edited by the website owner for accuracy and compliance. Look for a trust mark below for verification details. No representation is made that any approach described will achieve a particular result, and no regulatory or professional body has reviewed or endorsed this content. Because each situation is different, readers should consult a qualified professional about their specific circumstances before acting. Images accompanying these articles are protected by copyright and may not be copied or reused.
Amortization is an accounting practice of spreading the cost of an intangible asset over its useful life. Examples of intangible assets, according to the Internal Revenue Service’s “Section 197 Intangibles,” include goodwill, intellectual property such as trademarks, patents, and government or agency-granted permits or licenses. These are all assets that must be amortized over 15 years.
Based on IRS regulations, when it comes to determining how an asset is expensed over its useful life, amortization is most similar to the straight-line basis method of depreciation.
It’s important to note that the timeframe of amortization is subject to interpretation. Examples, according to the IRS, include a 36-month amortization timeline for computer software because it’s not categorized as an asset under the same IRS Section. Other examples not mandated to be amortized under a 15-year time frame include interests to land, business partnerships, financial contracts (such as interest rate swaps) or creation of media.
Depreciation
One of the main differences when it comes to depreciation is that it focuses on tangible or fixed assets and requires a certain percentage of its useful life to be allocated each year. Examples of assets that can be expensed include trucks for service calls, computers, printers, equipment for production, etc. Another important difference is that the asset’s salvage value is deducted from the asset’s starting cost. The remaining balance (original cost – salvage cost) determines annual expensing amounts, which is divided by the asset’s years of useful life.
Along with the above method of depreciation, also called “Straight-Line Method,” there are other ways depreciation can determine how much is expensed annually and over the asset’s useful life. For example, Declining Balance or Double Declining Balance methods are alternate ways businesses can depreciate their assets – some frontload the amounts to take advantage of accounting/tax rules to reduce their tax liabilities. Another way is to depreciate via Units of Production. This method pro-rates the level of an asset’s expected use within a particular accounting period, on a per-unit basis, to determine how much the company can expense during a particular accounting timeframe.
When it comes to accounting for goodwill, according to a November 2020 electronic survey of CFA charter holders by the CFA Institute, respondents found that investors who see amortization used by companies still require investors’ due diligence. Sixty-one percent of respondents said there need to be alternate ways to figure out if management is effective or not, and 63 percent said that amortization “distorts financial metrics.”
When it comes to understanding and navigating the differences between amortization and depreciation, business owners and investors need to be well-versed in performing due diligence to ensure compliance.
When there’s a question of the benefit that tangible or intangible assets provide businesses, there are many factors that must be weighed to make internal accounting procedures effective. Businesses must determine how the cost of business assets can be expensed each year over the asset’s lifespan. Looking at how amortization and depreciation work, implementing both processes depend on the type of asset being expensed. There are noticeable differences for each method, including how to salvage value is considered, whether accelerated expensing is allowed, and how each type is expressed on financial statements.
Amortization
Amortization is an accounting practice of spreading the cost of an intangible asset over its useful life. Examples of intangible assets, according to the Internal Revenue Service’s “Section 197 Intangibles,” include goodwill, intellectual property such as trademarks, patents, and government or agency-granted permits or licenses. These are all assets that must be amortized over 15 years.
Based on IRS regulations, when it comes to determining how an asset is expensed over its useful life, amortization is most similar to the straight-line basis method of depreciation.
It’s important to note that the timeframe of amortization is subject to interpretation. Examples, according to the IRS, include a 36-month amortization timeline for computer software because it’s not categorized as an asset under the same IRS Section. Other examples not mandated to be amortized under a 15-year time frame include interests to land, business partnerships, financial contracts (such as interest rate swaps) or creation of media.
Depreciation
One of the main differences when it comes to depreciation is that it focuses on tangible or fixed assets and requires a certain percentage of its useful life to be allocated each year. Examples of assets that can be expensed include trucks for service calls, computers, printers, equipment for production, etc. Another important difference is that the asset’s salvage value is deducted from the asset’s starting cost. The remaining balance (original cost – salvage cost) determines annual expensing amounts, which is divided by the asset’s years of useful life.
Along with the above method of depreciation, also called “Straight-Line Method,” there are other ways depreciation can determine how much is expensed annually and over the asset’s useful life. For example, Declining Balance or Double Declining Balance methods are alternate ways businesses can depreciate their assets – some frontload the amounts to take advantage of accounting/tax rules to reduce their tax liabilities. Another way is to depreciate via Units of Production. This method pro-rates the level of an asset’s expected use within a particular accounting period, on a per-unit basis, to determine how much the company can expense during a particular accounting timeframe.
When it comes to accounting for goodwill, according to a November 2020 electronic survey of CFA charter holders by the CFA Institute, respondents found that investors who see amortization used by companies still require investors’ due diligence. Sixty-one percent of respondents said there need to be alternate ways to figure out if management is effective or not, and 63 percent said that amortization “distorts financial metrics.”
When it comes to understanding and navigating the differences between amortization and depreciation, business owners and investors need to be well-versed in performing due diligence to ensure compliance.
These articles provide general information on tax, accounting, and financial topics for small businesses and individuals. They are educational in nature and are not specific legal, accounting, financial, tax, or other professional advice, and should not be relied upon as such. This content was prepared by Service2Client and may have been reviewed or edited by the website owner for accuracy and compliance. Look for a trust mark below for verification details. No representation is made that any approach described will achieve a particular result, and no regulatory or professional body has reviewed or endorsed this content. Because each situation is different, readers should consult a qualified professional about their specific circumstances before acting. Images accompanying these articles are protected by copyright and may not be copied or reused.
Respect for Marriage Act (HR 8404) – Introduced by Sen. Jerry Nadler (D-NY) on July 18, this Act replaces previous provisions that defined marriage as strictly between a man and a woman. It codifies marriage to state that a spouse may be a person of the opposite sex as long as the contract between the two individuals is valid under state law, and prohibits any state from denying out-of-state marriages on the basis of sex, race, ethnicity or national origin. The bill passed in the Senate on Nov. 29 and the final bill passed in the House on Dec. 8. President Biden signed the Act into law on Dec. 13.
