Author: Service2Client

Examining Differences Between Liquidity And Solvency

Differences Between Liquidity and SolvencyLiquidity looks at how well a company can handle paying wages, inventory, and lending repayments via measuring its cash or quasi-cash levels. Put another way, it looks at the health of a company’s cash flow to satisfy short-term financial obligations.

It’s important to be mindful of different sectors and what’s normal or healthy based on the time of year. For example, retail and manufacturing feature functionally focused companies, which means seasonality impacts their dynamic working capital requirements.

1. Current Ratio

The current ratio looks at the ratio of current assets divided by current liabilities. It measures how well a company is projected to pay its present obligations. If the result is 1.0 to 3.0, it’s considered financially well. However, if it’s higher than 3.0, suboptimal asset utilization may be incurred by the company, with a lower than industry average suggesting financial concern. It’s calculated as follows:

Current Ratio = Current Assets/Current Liabilities

The resulting current ratio can signal many things. For a growing current ratio, debt could be growing or cash levels falling. When the current ratio is falling, but not too low, and it’s a smooth downward trend, it can indicate the company is getting more efficient at moving inventory, collecting invoices, and reducing debt levels.

2. Quick Ratio or Acid Test

This is determined by taking the current assets and deducting inventory from them. Once that’s calculated, that number is divided by current liabilities. By looking at the business’ on-demand liquid assets without factoring in inventory, it’s calculated as follows:

Quick Ratio or Acid Test = (Current Assets – Inventory)/Current Liabilities

Resulting calculations above or equal to 1.0 show a company’s stable short-term fiscal health. It’s important to be mindful that a very high result can indicate there’s idle cash that’s not being reinvested, distributed to shareholders, or otherwise put to better use.

Defining Solvency

Solvency refers to the ability of a business’ complete assets to satisfy its complete long-term financial obligations and loan repayments. It’s especially helpful when the business is analyzed internally or externally to determine if the business can survive and thrive during challenging economic times (industry-specific or macro challenges). It helps determine the company’s creditworthiness, whether it’s a good bet for an investment, and/or the risk for companies to take on additional debt. It looks at not only the debt on the company’s financial statements, but also how it relates to equity, tangible assets, and EBITDA.

Debt to Equity

This measures how a company relies on debt versus its equity. It’s used when comparing one company against its industry competitors and how the company’s own ratio has trended over time. Looking at companies within the same industry, companies with a higher ratio indicate a riskier financial situation. Similarly, a ratio that’s too low can indicate a business not using debt to expand its operations effectively.

While liquidity and solvency are different, they are complementary for both owners and managers, along with external parties such as investors analyzing for the next potential investment.

6 Reasons for Mid-Year Tax Planning

Mid-Year Tax PlanningRight smack dab in the middle of summer might seem like the worst time to think about your taxes, but it’s actually the perfect time. Here’s what taking a pause in July allows you to do.

Get Organized

Do you have all your receipts? Are your records up to date? Did you move, get married, or change your name? If so, you’ll need to notify the IRS. In fact, you can create an individual IRS online account to look at your tax records, manage communication preferences, make payments, and more.

Take a Financial Snapshot

When was the last time you looked at your checking, savings or investments to see if you’re where you want to be? If you take the time now, you can start with January and analyze the big picture. You can see if you’re happy with the growth of your investments and discover where you can make adjustments. Taking time to do this now will pay off in the long run.

Examine Your Paycheck

Are your earnings correct? Are you withholding enough taxes? As mentioned at the top, any big life event (divorce, having a child, buying a home) can affect your taxes. If you need help, the IRS has a Tax Withholding Estimator that can help you figure out your income tax, credits, adjustments, and more. If you need to change anything, the Estimator will show you how to update your withholding with your employer or direct you to where you can submit a new W-4. Taking time to review could help you avoid an unwanted large tax bill and/or penalty come tax season.

Double-Check Deductions and Credits

Are you maximizing these? Early planning allows you to identify and leverage available deductions and credits, reducing your taxable income and potentially increasing your tax refund. 

Increase Your 401K Contribution

Are you happy with your contribution? Can you increase it and still make ends meet? When you contribute more from each paycheck, you’ll decrease your taxable income for the year. Since employers usually have matching programs, it’s a great way to get free money and build your nest egg. Make sure you’re in it if your company offers this.

Convert a Traditional IRA to a Roth IRA

If you think you’ll be in a higher tax bracket when you’re in retirement, converting a traditional IRA into a Roth IRA is one way to reduce your tax payments in the long run. Here’s how it works. The money you contribute to a Roth IRA is taxed the moment you contribute, unlike a traditional IRA, which is taxed at the moment of withdrawal. When you convert to a Roth IRA, you’ll be paying taxes at your current rate instead of the (probably) higher tax rate in the future. Translated: You’ll pay taxes up front, which might be a big savings. Finally, Roth IRAs are not subject to the same Required Minimum Distributions as traditional IRAs are. That means more freedom when you want it most – when you retire.

Getting a handle on your finances by being proactive now gives you a great opportunity to take a breath, assess, and change direction if you need to. If anything, it will help prevent stress and scrambling in tax season. It’s safe to say that nobody wants that.

Sources

https://fsa1.com/why-its-smart-to-start-tax-planning-in-july/

Mid-Year Tax Checkup

One Big Beautiful Bill Act: Part 1 – What the New Tax Law Means for You

Part 1

The One Big Beautiful Bill Act (OBBBA) passed the House on July 3 and was signed into law by President Trump. This comprehensive legislation makes several expiring tax cuts from the 2017 Tax Cuts and Jobs Act permanent while at the same time introducing several temporary provisions through 2028. In this two-part series, we will look at what the OBBBA means for taxpayers. In Part 1, we examine the impact on individual taxpayers; Part 2 will cover the Act’s impact on businesses, trusts, and estates.

Making TCJA Provisions Permanent

The bill primarily focuses on extending individual tax benefits sunsetting after 2025 since business tax benefits from the 2017 TCJA were already made permanent.

Income Tax Rates and Brackets: The current seven-bracket system is becoming permanent, with the highest rate staying at 37 percent.

Standard Deduction: The doubled standard deduction amounts are now permanent. For tax year 2025, this means individuals get $15,000, married couples filing jointly receive $30,000, and heads of household get $22,500.

Child Tax Credit: The credit increases from $2,000 to $2,200 per child, with future inflation adjustments. The credit remains subject to phase-outs beginning at $400,000 for joint filers and $200,000 for other taxpayers.

Alternative Minimum Tax (AMT): The TCJA increases to AMT exemptions are made permanent with inflation adjustments. For 2025, single filers get an $88,100 exemption that phases out at $626,350, while married couples filing jointly receive $137,000 that phases out at $1,252,700.

Changes to Deductions

State and Local Tax (SALT) Deductions: The current $10,000 cap on state and local tax deductions is raised temporarily to $40,000 with 1 percent annual increases through 2029. After that, it reverts to $10,000 in 2030. High earners with modified adjusted gross income in excess of $500,000 face a phase-down of this benefit.

Charitable Deductions: Starting in 2026, taxpayers who don’t itemize can claim an above-the-line deduction for charitable contributions up to $1,000 ($2,000 for married filing jointly). Those who itemize face new limits on deductions with modified carryover rules. The 60 percent contribution limit for cash gifts to qualified charities becomes permanent.

Mortgage Interest: The lower mortgage interest deduction cap of $750,000 (down from the previous $1 million) is made permanent. Interest on home equity debt unrelated to home improvements remains non-deductible.

What’s Eliminated: Several deductions are permanently eliminated, including personal exemptions (which remain at zero), miscellaneous itemized deductions subject to the 2 percent floor (unreimbursed employee expenses, tax preparation fees), and casualty and theft loss deductions except for federal disasters.

New Temporary Provisions (2025-2028)

Senior Deduction: Taxpayers over 65 can claim an additional $6,000 deduction, available whether they itemize or take the standard deduction. This phases out for joint filers earning $150,000 to $350,000 and other taxpayers earning $75,000 to $175,000. According to the White House, this provision will increase the percentage of seniors not paying tax on Social Security benefits from 64 percent to 88 percent.

No Tax on Tips: Workers in traditionally tipped industries who don’t itemize can deduct up to $25,000 of reported tips. This federal income tax deduction doesn’t affect state taxes or payroll taxes for Social Security and Medicare. High earners making over $160,000 are excluded, and the deduction applies to both cash and credit card tips.

No Tax on Overtime: A deduction for qualified overtime pay up to $12,500 ($25,000 for married filing jointly) is available for non-itemizers. This phases out for taxpayers with income over $150,000 ($300,000 for married filing jointly) and disappears entirely at $275,000 for single filers.

Auto Loan Interest: Interest on loans for U.S.-assembled cars becomes deductible up to $10,000, but only for vehicles assembled domestically. The deduction phases out for individuals earning over $100,000 (single) or $200,000 (married filing jointly). Campers and RVs are excluded.

Trump Accounts: New tax-advantaged accounts benefit children under 8. Parents can contribute up to $5,000 annually (adjusted for inflation), with funds locked until the child turns 18. Withdrawals for college, first-time home purchases, or starting a business are taxed at favorable capital gains rates. The government will deposit $1,000 for qualifying U.S. citizen children born between Dec. 31, 2024, and Jan. 1, 2029, with no income limits.

Additional Provisions

529 Education Plans: Tax-free distributions can now cover K-12 expenses at private and religious schools, plus additional qualified higher education expenses, including “postsecondary credentialing expenses.”

Pease Limitations: The previous caps on itemized deductions for high earners are permanently eliminated, replaced by a 35-cent-per-dollar limit on itemized deductions.

Gambling Losses: The ability to deduct gambling losses and related expenses is made permanent, but losses are limited to 90 percent of gains from the taxable year.

Looking Ahead and Conclusion

Tax professionals will be busy helping clients navigate these changes and identify new planning opportunities. The legislation creates a complex mix of permanent and temporary provisions that will require careful tax planning, particularly as the temporary provisions expire after 2028. Taxpayers should consult with tax professionals to understand how these changes affect their specific situations and develop appropriate strategies.

Understanding the Goodwill to Assets Ratio

Understanding the Goodwill to Assets RatioThe goodwill to assets ratio measures how much of a company’s total assets come from goodwill – an intangible asset like brand value or customer loyalty – and it plays a role in assessing the company’s overall value. It provides a ratio or percentage of the amount of intangible versus tangible assets. Understanding what the ratio represents, how it is calculated, and how to interpret it is essential for effectively applying it to business operations and investment decisions.

Goodwill Defined

Goodwill can be defined as an intangible asset that comes about when the acquiring firm obtains such assets from the acquired firm at a higher value. When it comes to accounting standards, both International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP), intangible assets must be evaluated for impairment, but don’t need to be amortized. Based upon IFRS 38, goodwill is generated solely during an acquisition and is defined as the amount of the acquisition price for the acquired company over its book value. IFRS 38 does not recognize goodwill generated by the company internally.

Calculating Goodwill

Goodwill = Liabilities – Assets + Purchase Price

If a company looks at acquiring another company for $750,000, and the company being acquired has assets of $900,000 and liabilities of $450,000, the net assets would be $450,000. Based on the goodwill formula:

Goodwill = $450,000 – $900,000 + $750,000 = $300,000

Once the goodwill has been established, the Goodwill to Assets Ratio Formula is used as follows:

Goodwill to Assets Ratio = Unamortized Goodwill / Total Assets

If one company is putting itself up for sale with a selling price of $75 million, it would have to establish its book value, based on recent financial statements, along with its goodwill value. Factors that go into calculating a company’s goodwill include if the company has prime real estate, a well-known brand, a rich list of clients, or intellectual property that sets itself apart from competitors in the industry that won’t expire for years. For example, if its intangible assets are $15 million, subtracted from its selling price of $75 million, its tangible assets or book value would be $60 million.

Based on the ratio, it’s calculated as follows:

$15 million / $75 million = 20 percent

Therefore, the ratio is 20 percent for the company’s goodwill as part of the company’s valuation. Otherwise, if the purchase goes through, whoever buys the company spends 20 percent on the company’s goodwill.

Analyzing the Goodwill to Assets Ratio

This ratio gives an overview of a business’s financial health. The lower the ratio, the more tangible or physical assets that can be sold. Conversely, the higher the ratio, the fewer intangibles a company has. Much like assets that can be written down, so can a company’s goodwill.

This ratio is not one-in-all and should be measured against businesses within the same industry. Based on this analysis, if a company has a large amount of goodwill on its financial statements, if it’s written down, it could still result in a lower valuation despite the company having a large amount of assets.

Looking over time, it shows the importance of ongoing evaluations. In 1975, according to the University of California, Los Angeles, companies on the Standard and Poor’s 500 (S&P 500) had $122 billion of intangible assets and $594 billion of tangible assets, or about a 21 percent intangible to tangible assets ratio. These companies included most industrial and energy sector names like GE, Procter & Gamble, 3M, Exxon Mobil, along with IBM, based on market capitalization. However, in 2018, the ratio increased to 84 percent of intangible to tangible assets. Intangible assets accounted for $21.03 trillion and $4 trillion when looking at most of the companies on the S&P 500, which included Apple, Alphabet, Microsoft, Amazon, and Facebook, based on market capitalization.

While the growth of technology and communication services has risen and skewed the tangible to intangible ratio, it shows the importance of evaluating companies and sectors individually, not just with a broad brush.

Sources

Boom of Intangible Assets Felt Across Industries and Economy

Why AI Falls Short for U.S. Tax Guidance

Why AI Falls Short for U.S. Tax GuidanceThe rise of artificial intelligence tools like ChatGPT and Grok has transformed how Americans seek information. From meal planning to complex financial questions, these platforms offer instant answers to virtually any query. But when it comes to U.S. tax advice – especially international tax matters – relying on AI can lead to serious and costly mistakes.

The Allure and Limitations of AI Tax Help

The appeal of AI for tax questions is understandable. However, AI’s limitations become glaringly apparent in international tax matters. This specialized field combines extraordinary complexity with constant change, creating a perfect storm that exposes AI’s weaknesses. The landscape shifts regularly through regulatory updates, IRS interpretations, and court decisions – changes that AI systems struggle to incorporate in real-time.

Consider the IRS Practice Units, internal training materials for tax examiners that became public in 2020. From January through early May 2025 alone, the IRS released 35 new Practice Units, with 22 addressing intricate international tax topics such as foreign tax credit computations, base erosion anti-abuse tax, and treaty provisions. These rapidly evolving resources represent just one stream of constantly changing tax guidance that AI models could fail to capture, leading to outdated or incomplete advice.

How AI Gets Tax Advice Wrong

AI’s accuracy problems stem from its fundamental design. Large language models like those powering ChatGPT and Grok train on vast amounts of text from diverse sources – online forums, books, articles, websites, and public records. This training produces responses that sound authoritative and conversational, but this polish masks significant limitations.

The core issue is what experts call “simplexity” – AI’s tendency to oversimplify complex tax law. When AI presents intricate regulations as straightforward concepts, it fundamentally misrepresents the law itself. This problem has already surfaced with the IRS’s own Interactive Tax Assistant chatbot.

AI systems also suffer from interpretation errors, reliance on outdated information, and conflation of similar but distinct tax concepts. For instance, an AI might confuse the Foreign Tax Credit with the Foreign Earned Income Exclusion – similar-sounding but entirely different provisions with vastly different implications.

The Real-World Cost of AI Errors

Mistakes in international tax compliance carry severe consequences. The IRS considers international tax enforcement a top priority, and errors in reporting foreign income or assets trigger substantial penalties. A late FBAR or foreign information return like Form 8938 or 5471 carries a $10,000 penalty. Errors involving foreign assets can result in a 40 percent accuracy-related penalty on unpaid taxes.

Importantly, relying on AI advice won’t qualify as “reasonable cause” to avoid these penalties. Last year, the U.S. Taxpayer Advocate Service highlighted a Washington Post analysis showing that AI chatbots from major tax preparation companies provided incorrect advice up to 50 percent of the time on complex questions. Beyond financial penalties, taxpayers face the stress of audits and the time-consuming burden of correcting mistakes.

Why Human Expertise Remains Essential

While AI continues to advance, it currently falls far short of replacing human expertise in international tax matters. Experienced tax professionals bring irreplaceable skills that algorithms cannot match. They stay current on evolving IRS guidance, monitor treaty updates, and analyze new case law. Most importantly, they apply professional judgment to each unique situation.

International tax planning rarely follows a one-size-fits-all approach. Professionals provide strategic thinking and contextual analysis that optimize outcomes for specific circumstances. They understand when exceptions apply, how different rules interact, and what documentation requirements must be met. These nuanced judgments remain beyond AI’s current capabilities.

Conclusion

This doesn’t mean AI has no role in tax planning. It can serve as a useful starting point for understanding basic concepts or generating initial questions to discuss with a professional. However, treating AI as a substitute for qualified tax advice is a risky gamble.

The appeal of instant, free tax guidance is strong, but the cost of getting it wrong can be devastating. Until AI can match the precision, current knowledge, and professional judgment of experienced tax professionals, taxpayers would be wise to view it as a supplement to – not a replacement for – human expertise.

Quantum Computing: Separating Hype from Real-World Business Value

Quantum ComputingLately, there has been a lot of talk about quantum computing, drawing interest from many, including business leaders. Quantum computing promises to solve previously unsolvable problems and revolutionize entire industries. As a result, excitement around its potential is rapidly growing. However, it is important to first ask where the hype ends and the real business value begins.

What is Quantum Computing?

Simply put, quantum computing is a new way of processing information. Unlike classical computers that use bits that are either 0 or 1, quantum computers use qubits (quantum bits). Qubits can exist in multiple states simultaneously as enabled by the principles of superposition and entanglement. This allows quantum computers to process vast amounts of information in parallel. Hence, quantum computers can theoretically tackle certain classes of problems that would take classical computers years to solve.

The Hype: Quantum’s Promised Revolution

Quantum computing is said to have the potential to perform tasks such as cracking encryption, revolutionizing drug discovery, optimizing global supply, and transforming artificial intelligence. Forecasts like one from Boston Consulting Group (BCG) project that quantum computing could unlock up to $850 billion in economic value by 2040. As a result, major industries are investing heavily and hoping to be among the first to benefit from a potential industrial revolution.

The Reality: Technical and Practical Challenges

The reality tells a different story. Today’s quantum hardware is still in its infancy, with most of these computers having fewer than 100 reliable qubits. They face issues such as noise and error rates that make large-scale practical applications elusive. Unlike classic chips that can be stacked for scaling needs, quantum systems can’t be easily scaled and need major advances in architecture and interconnects. Specialized expertise is also required to develop software for quantum machines. Besides, the algorithms that fully exploit the quantum advantage are still being researched. McKinsey estimates that while there may be many operational quantum computers by 2030, their ability to solve complex problems will take more time to mature.

This isn’t to say there is no hope as more improvement is made to quantum computing every day. Consider Google’s Willow, a 105-qubit processor introduced in December 2024. Willow addresses the error correction challenge and performs certain computations in under five minutes, which would take a supercomputer 10 septillion years.

Real-World Business Applications

Despite these challenges, quantum computing has demonstrated potential in real-world use cases. One example is Volkswagen who partnered with quantum computing firms to optimize traffic flow in Lisbon. This demonstrated how quantum algorithms can improve urban mobility. In finance, quantum-inspired algorithms are being tested for portfolio optimization and risk analysis by companies like JPMorgan Chase. Pharmaceutical companies are also testing molecular interactions with quantum simulation to potentially accelerate drug discovery. It’s worth noting that these applications are mainly hybrid solutions that use both quantum and classical computing. Even so, it signals there is potential in future breakthroughs.

Cloud-based quantum computing availed by platforms like IBM, Microsoft and Google have greatly contributed to this venture. These resources have made experimentation possible without the need for in-house quantum hardware. Therefore, businesses have a chance to innovate solutions to complex problems more affordably.

An example of a strategic framework that can help business leaders is the “quantum economic advantage” developed by MIT and Accenture. It requires two conditions: a quantum computer capable of handling the problem’s size (feasibility) and a quantum algorithm that outperforms a similarly priced classical solution (algorithmic advantage). Only when both conditions are met does quantum computing become economically beneficial.

How Businesses Should Get Ready for Quantum Computing

Preparing for quantum computing doesn’t require immediate transformation; however, it does call for strategic foresight. Here’s how businesses can begin laying the groundwork today.

  • Create a Quantum Strategy: Identify potential long-term use cases where quantum could offer an edge, and develop a roadmap aligned with industry trends and business goals.
  • Invest in Collaboration and Research: Partner with universities, quantum startups, and industry groups to stay updated and explore early-stage innovations.
  • Start Quantum-Proofing Security: Begin evaluating quantum-resistant encryption methods to safeguard future data as quantum threats to cybersecurity emerge.
  • Experiment Safely: Use cloud-based quantum platforms to run small pilots or simulations, gaining hands-on experience without major commitments.
  • Build Internal Capability: Upskill current staff in foundational quantum concepts to ensure your team can engage with this evolving technology when the time is right.

Final Thoughts

Quantum computing is in its early stages, but its disruptive potential and rapid development give businesses a reason to start planning on its adoption, or risk falling behind. Integrating quantum has the potential to boost efficiency, cut costs, and enable innovative products and services. To stay competitive, businesses should start building a quantum-ready workforce through training, hiring, and academic partnerships.

How to Navigate Money Before Saying ‘I Do’

How to Navigate Money Before Saying 'I Do', wedding finances, marriage finances,According to a Bankrate Financial Infidelity Survey, 28 percent of couples said they considered financial cheating as bad as physical cheating. Furthermore, money is one of the top reasons for divorce, says Rahkim Sabree, counselor and financial therapist with the Financial Therapy Association. With these facts in mind, it makes good sense to get all your financial cards on the table (literally and figuratively) before you tie the knot. Here are a few ways to navigate this often thorny subject and create a healthy relationship with money as a couple.

Have a Money Date

Be intentional and carve out dedicated time to discuss the big issues that you both might have questions about.

  • How will we handle student loans?
  • How many children will we have, if any? Will they go to public or private schools?
  • Where will we live? Close to or far away from family?
  • Where would we like to be in our careers in 5, 10, or 20 years?
  • When do we want to retire? How will we spend our retirement?

If talking about these things is difficult, you might consider premarital financial counseling. When you can get on the same page before you get that other page – your marriage license – you’ll be way ahead of the game.

Set Up a Financial Plan, Pre-Marriage

While this conversation probably won’t be romantic with flowers and candlelight, it’s a time where you can share the excitement of your future. While you may not see eye-to-eye on everything, set up short-term goals, long-term milestones, and seek the middle ground when disagreements arise. Remember, life happens. Goals may change. There will be job losses, health issues, and unexpected expenses like HVAC going out or plumbing problems. The idea is to remain flexible and tuned in to each other’s spending habits by using apps like YNAB (You Need a Budget), Empower, or Tiller. When you’re transparent and can see who is spending on what, you can maintain an open dialogue about your cash flow.

Decide if You Want a Prenup

Depending on your resources and if you have children from a previous marriage, you might want to consider a prenuptial agreement. Again, it’s not the most comfortable topic to discuss because it implies that there’s an end to what is ostensibly just beginning. That said, it can pre-empt future problems that might otherwise cause a divorce. It’s also important in the case of death because if you don’t have a prenup, a judge, not the couple, gets to decide who gets what, which might result in an unsatisfactory distribution.

Figure Out Your Checking Accounts

Joint or separate? This is totally up to you, but according to Bankrate, 24 percent of couples have separate accounts; 38 percent have both joint and separate; and 39 percent have a joint account. This topic should be part of your money date.

Consolidate Debt

If you both have debt, consolidate and start paying it off. If you’re thinking about buying a home, lenders will look at debt-to-income ratio to see how much of your total income is being used to pay off debt. If your debt is too high, you might have trouble getting a mortgage. Be honest about it. Have the tough conversations before you say, “I do.” You probably don’t want to surprise your future spouse when you’re in the already emotional process of putting a bid on a house.

Bottom line, figuring out a financial plan for your marriage can be challenging, if not downright tough. But the best time to sort through all of this is before you walk down the aisle. When you have a roadmap, the chances for a successful financial future together increase exponentially.

Sources

Money And Marriage: What To Consider Before Tying The Knot | Bankrate

Decoding Net Realizable Value (NRV)

Decoding Net Realizable Value (NRV)Whether it’s maintaining compliance with accounting standards or ensuring asset values are not overvalued for internal stakeholders or external existing or potential new investors, looking at net realizable value (NRV) is an important concept to understand and discuss how it’s implemented.

Defining NRV

Net realizable value examines what an asset can be sold for after accounting for selling or disposal costs. This results in the final value of inventory or accounts receivable. Used by both the International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP), it embodies the concept of accounting conservatism that compares NRV to the inventory’s cost. This notion leads accountants to value assets to produce lower profits and not overvalue assets when expert analysis is mandated for the deal review.

NRV is used in the lower-cost or market method of accounting reporting. The market method reporting approach requires a business’ inventory must be reported on the balance sheet at a lower value than either the historical cost or the market value. If there’s no known market value of the inventory, the NRV value can be used to approximate the market value.  

Calculating NRV

Step 1: The asset’s projected selling price or market value must be determined.

Step 2: The manufacturing and sales expenses connected with the asset must be determined. This also includes advertising and conveyance fees, for example, when factoring in costs.

Step 3: Determine the gap between the asset’s projected asking amount and the fees the company incurs to finish the goods and sell it.

This is calculated via the following formula:

NRV = Expected Selling Price – Total Production and Selling Costs

If a company is looking to sell a percentage of its inventory, it needs to figure out the NRV of the inventory that will be sold.

Assuming the selling price is $10,000, it needs to spend $1,500 on finishing costs and another $750 in transportation expenses. Therefore, NRV is calculated as follows:

NRV = $10,000 – ($1,500 + $750) = $7,750

When it comes to valuing current assets such as accounts receivable (AR), this approach can similarly determine the NRV of the unpaid invoices from their clients. This is accomplished by summing their ARs and then subtracting the uncollectible accounts. For example, if there’s $100,000 in outstanding invoices, but $20,000 is uncollectible due to clients’ inability to pay or otherwise cannot be collected. In this type of calculation, instead of determining the production and sales amounts, a business’ allowance for doubtful accounts is substituted. 

Conclusion

While these calculations assist investors and business owners in determining accurate costs of current assets, there are some considerations. For example, in periods of inflation or deflation, businesses must continually evaluate the net amount of the resulting calculation instead of the gross figures. Along with the increased and continual updating of NRVs, since the future price discovery of asset prices is unknown, there’s always room for uncertainty, which investors are constantly trying to determine how efficiently the market is presently pricing things.

While NRV is a single type of calculation, it’s an important one that can help businesses make the most of their inventory, accounts receivable, and similar accounting entries.

New Tax Cut & Spending Bill, Protecting Law Enforcement, VA Benefits and Semiconductor Supply Chains

New Tax Cut & Spending BillOne Big Beautiful Bill Act (HR 1) – Introduced by Rep. Jodey Arrington (R-TX) on May 20, this tax bill supports the president’s tax and immigration agenda. The legislation includes:

  • Making permanent the income and estate tax cuts passed in the Tax Cuts and Jobs Act of 2017
  • Waiving income taxes on cash tips, overtime pay and interest on some auto loans (ends 2028). The tip waiver would be a tax deduction of up to $25,000/year on cash-only tips for workers making less than $160,000/year; FICA taxes would still apply to tips.
  • Temporarily increasing the standard deduction (ends 2028)
  • Reducing the amount of income subject to income taxes
  • Temporarily increasing the child tax credit to $2,500 (ends 2028)
  • Increase the estate tax exemption to $15 million and adjust for inflation going forward
  • Increase the SALT cap to $40,000 for incomes up to $500,000, phasing downward for higher incomes, but increasing the cap and income threshold by 1 percent a year over 10 years

To offset the tax cuts, the bill proposes the following spending cuts:

  • Repeal or phase out clean energy tax credits
  • Reduce Supplemental Nutrition and Assistance Program (SNAP) funding by $267 billion over 10 years (and shift a higher percentage of program benefits and administration costs to states)
  • For able-bodied, food-aid beneficiaries without dependents, work requirements would increase from age 54 to 64
  • Increased work requirements for aid to parents based on the child’s age, from 18 down to 7
  • Reduce funding for Medicaid by $700 million
  • Require able-bodied Medicaid beneficiaries without dependents to engage in work, education, or service for at least 80 hours a month beginning in 2026
  • Revamp the student loan program to yield $330 billion in savings
  • Repeal the regulation that allowed students to cancel loans if their college defrauded them or closed suddenly
  • Increase leasing of public lands for drilling, mining, and logging

Additional components of the bill include:

  • Imposing stricter eligibility and income verifications for ACA exchange customers
  • Shortening the ACA enrollment period by one month
  • Prohibiting Medicaid funds from going to Planned Parenthood
  • Canceling a current regulation for minimum staffing in nursing homes
  • $46.5 billion to construct a wall along the U.S.-Mexico border
  • $6.1 billion to fund Border Patrol agents, customs officers, and investigators
  • Impose a $1,000 fee on migrants seeking asylum
  • Remove 1 million immigrants a year and house 100,000 people in detention centers
  • Eliminate the $200 tax on gun silencers
  • $150 billion in new funding for the Defense Department and national security, such as building a missile defense shield (Golden Dome), restocking the nation’s ammunition arsenal and expanding the Navy’s fleet of ships
  • New parents will receive $1,000 from the federal government via a “Trump” account for each baby born during Trump’s second term. Parents may contribute an additional $5,000 a year to the account, earnings would grow tax-deferred in a broad stock index, with qualified withdrawals (higher education, starting a business or purchasing a home after age 18; any purpose after age 30) taxed at the long-term capital-gains rate; nonqualified withdrawals taxed as ordinary income.

The House bill was passed on May 22 and now undergoes scrutiny in the Senate, where there will likely be considerable changes.

Securing Semiconductor Supply Chains Act (S 97) – This bill would enable state-level economic development organizations to increase foreign direct investment in semiconductor-related manufacturing and production. It was introduced by Sen. Gary Peters (D-MI) on Jan. 15 and passed in the Senate on May 20. The legislation is currently under review in the House.

VA Budget Shortfall Accountability Act (HR 1823) – Introduced on March 4 by Rep. Jack Bergman (R-MI), this act would instruct the secretary of the VA and the U.S. comptroller general to report on Veterans Benefits Administration funding shortfalls for fiscal year 2024 and expected funding shortfalls of the Veterans Health Administration in fiscal year 2025. The bill passed in the House on May 19 and is under consideration in the Senate.

Improving Law Enforcement Officer Safety and Wellness Through Data Act (HR 2240) – This bill would require the attorney general to provide regular reports on violent attacks perpetrated against law enforcement officers, as well as for other purposes. Introduced by Rep. Tim Moore (R-NC) on March 21, the bill passed in the House on May 15, and its fate currently lies in the Senate.

Cash Flow Available for Debt Service (CFADS)

Cash Flow Available for Debt Service (CFADS)When it comes to the risk of default, Moody’s found that during COVID-19, American businesses had a 7.8 percent chance of defaulting. This is compared to a low of 4 percent in 2021, but lower than the current 9.2 percent risk of default, according to a March 2025 report by the rating agency.

Also known as cash flow available for debt service, CFADS determines how much cash is available to service debt obligations. It looks at different cash inflows/outflows to show both internal (owners and managers) and external audiences (investors) how efficient (or not) a business is in its ability to produce cash flows and manage its debts without defaulting.

While one method businesses use is balancing client sales, it is also common to look at various accounting entries, including Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). The results of CFADS are often used by financial analysts when creating coverage ratios, including the project life coverage ratio (PLCR), the debt service coverage ratio (DSCR), and the loan life coverage ratio (LLCR). It can sometimes take the place of EBITDA in certain circumstances. It’s important to note that the three coverage ratios show how well a plan is able to service and not default on debt throughout the entire project’s period.

For example, the DSCR = CFADS / Scheduled Debt Service (Interest + Principal Obligations)

Once this is calculated based on the company’s project specifications, if the result is greater than 1, then it signifies and gives greater confidence to internal and external audiences that the company will be able to meet its milestones and final payments.

The most efficient formula for calculating CFADS is as follows:

EBITDA – Taxes – Positive or Negative Result of Working Capital – Capital Expenditures for Maintenance Only

$200,000 (EBITDA) – $30,000 (Taxes) + $20,000 (assuming there’s a negative $20,000 change in working capital) – $40,000 (assuming the capital expenditure investing in maintenance)

CFADS = $150,000

Sometimes the calculation includes dividends, which need to be factored into the calculation. This example assumes it is not part of the calculation.

Interpreting Results

It’s important to understand that a more detailed analysis helps all audiences determine if the projected cash flow is available for different claimants of the business. While most of the calculations are done via the waterfall model, it’s important to analyze it based upon senior and junior debt, along with equity. If a company declares bankruptcy, senior debt holders are the first priority to be made whole (or as whole as possible, depending on the circumstances). Senior debt is collateralized or secured with company assets that are sold off during bankruptcy. From there, junior debt holders are next in line, followed by convertible note holders, then preferred stockholders, and finally common stockholders.

While this calculation is only one part of the way internal and external stakeholders can measure a company’s financial health, with the chance of more firms defaulting on debt, it’s another tool in a financial analyst’s toolbox.