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Ask Dr. Fiona Chen Your Own Question
Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 355
Experience:  Former IRS Revenue Agent
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I am a c corp. I have the following changes to my balance

Customer Question

I am a c corp. I have the following changes to my balance sheet.
inventory went up by $3188
ap increased by $857
ar decreased by $37,979what is the impact on my profits (and therefore my tax liability)
Submitted: 2 months ago.
Category: Tax
Expert:  Dr. Fiona Chen replied 2 months ago.

Dear Customer,

Balance sheet items do not necessarily affect your profit and tax liabilities.

A. Inventory is your cost of goods sold. It is like a type of expenses; however, when it is on the book, it is your assets. When you use it, reducing the inventory actually is increasing your expenses, reduces your profit and thus, reduces your tax liabilities.

However, when the inventory is increased (went up), how it is affect your income and expenses depends on your 1) accounting method, accrual or cash basis, 2) type of industry you are in, and 3) the reason the inventory went up, most of the times, this could have no effect on your profit until they are used and be out of the inventory. When it is a line item on the balance sheet, increasing the inventory has no effect on the income and expenses and no effect on tax.

B. AP increased. When you have accounts payable, the expense has been registered. The profit reduces.

C. AR decreased. It is a type of assets account. When you register your income, your AR increases. That is when the income is increased. However, when it is reduced, say, by we receiving cash paid off by our customers, it has no effect on income or expenses.

Regards,

Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP

Customer: replied 2 months ago.
I understand inventory, thanks
still confused on AP and AR.in my example my AR year over year decreased.....which means I collected more money. Are you saying this has no impact on profits as it relates to this change in the balance sheet?
Expert:  Dr. Fiona Chen replied 2 months ago.

Dear Customer,

It increases your cash, but did not increase your income. The income is increased, recognized, when you registered the increase of AR.

Regards,

Fiona

Customer: replied 2 months ago.
remember please I am not talking about inside the year changes to these categories I am talking about end of year changes and how they affect the amount of profit I have to report as income.on ap I have assumed that if my ap increased my profits increased
on ar I have assumed that if my ar decreased my profits decreasedplease don't be confused by my use of terms like profits/income etc. these mean different things to you. I am not a tax professional of course. I am just trying to get to the question of.......is the amount of income tax going to increase of decrease given the end of year changes I described.
Customer: replied 2 months ago.
are you still with me
Expert:  Dr. Fiona Chen replied 2 months ago.

Dear Customer,

Yes. I am still here. From time to time, I may be working on other projects. But I will not leave you until the question you post is answered.

It seems that your questions expanded a little.

Would you please tell me if this is a homework exercise or are you an account so that it helps me know how to related the discussion to you.

Your income is not decided by the balance sheet items. They are decided by the income and expenses which are the items on the first page of tax return of you Form 1120.

Q: on ap I have assumed that if my ap increased my profits increased

No, if you need to pay more bills, your expenses increase and your profit reduces.

Q: on ar I have assumed that if my ar decreased my profits decreased

No, AR increases, profit increases.

On your late posting, when you collect cash and AR decreases, it is assets change forms. They went from AR to cash.

Regards,

Fiona

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