Make sure your inventory numbers are accurate

 

For many companies, inventory is a significant dollar amount on the company's financial statements. So it's crucial that recorded inventory balances reflect actual values. When such accounts aren't properly stated, the cost of goods sold and current ratios — numbers that often matter to decision makers — may be skewed. If banks discover that your company's inventory accounts are overstated, they may not extend credit. If, when necessary, inventories aren't "written down" (their values lowered in the accounting records), fraud may go undetected or the company's net profits may appear unrealistically rosy.

Inventories decline in value for a variety of reasons. You might be in the business of selling electronic equipment to retail customers. Over time, yesterday's "latest and greatest" gadgets become today's ho-hum commodities. Such goods still have value, but they can't be sold at last year's prices. Your inventory is experiencing "obsolescence."

Inventory "shrinkage" is another term that's often used to describe declining inventory values. Let's say you run a construction materials company. Unbeknownst to you, a dishonest supervisor is skimming goods from your shelves. A periodic inventory count that's compared to your company's general ledger might show that inventory is declining faster than it's being sold. As a result, you may decide to investigate and to reduce inventory values in your accounting records.

Other examples of shrinkage might include a clothing store that loses inventory due to shoplifting or a warehouse facility that's hit by a storm. In both cases, inventories may need to be written down in the company books to more accurately reflect actual values. If your company holds goods that are subject to evaporation, some of your inventory value might "vanish into thin air." Under another scenario, a shady supplier might bill your company for goods that aren't actually shipped or received. If invoices are recorded in your accounting records at full cost, your inventory may end up being overstated.

For some companies, several sources feed into inventory values. A manufacturing concern, for example, might add all the expenses needed to prepare goods for sale — including factory overhead, shipping fees, and raw material costs — into inventory accounts. When those supporting costs fluctuate, inventory accounts are often affected.

To ensure that your inventory numbers remain accurate, it's a good idea to conduct regular physical counts and routinely analyze the accounts for shrinkage, obsolescence, and other evidence of diminishing value.

aconner@atconnercpa.com

Run the numbers before doing a "no-cost" refinancing

 

When lenders admonish you to refinance your mortgage because "interest rates are at historic lows," they aren't kidding. Just ask anyone who lived through the late 1970s when mortgage interest rates climbed to over 15%. But when you refinance a mortgage, it's especially important to slow down, read the fine print, and beware of offers that sound too good to be true. As many economists have preached, "There's no such thing as a free lunch." In other words, don't expect to get something for nothing.

That maxim holds true even with "no-cost" refinancing. You may skate through the refinancing process without opening your wallet or writing a single check, but be assured that someone will cover the costs. After all, appraisers need to be paid. Title companies charge for conducting title searches. Setting up title insurance isn't free. Lenders, escrow agencies, local governments — all want payment for their role in refinancing your mortgage.

In a "no-cost" refinancing, how are such routine closing costs covered? A lender might simply roll the closing expenses into the balance of your new mortgage. You might refinance a mortgage to reduce your monthly payment and total interest expense. But if a lender adds closing costs to your new mortgage, you may find that the benefit of that lower interest rate disappears. That's especially true if you end up with a larger mortgage balance over a longer term.

A lender might also increase the interest rate on the mortgage to cover closing costs without passing them on to you — at least initially. You don't pay the costs upfront, but the lender recovers those costs over the term of the loan because you're paying more interest.

Let's say you apply for a "no-cost" refinance of your $150,000 mortgage. The refinanced mortgage will be paid off in 15 years. If one mortgage has a fixed annual rate of 4.5%, you'll pay about $56,500 in interest; if the interest rate is increased by just half a percent to 5%, your total interest will be $63,500 and your monthly payment (principal and interest) will be about $40 more. Accordingly, it may make more sense to pay the closing costs upfront and avoid the higher interest rate.
Bottom line: Be sure to do the math before signing papers on that "no-cost" refinance.