How to Develop an Employee Leave Policy During COVID-19

According to the United States Department of Labor’s Wage and Hour Division, the Families First Coronavirus Response Act addresses how select businesses must give their workers paid sick leave or expanded family and medical leave under permitted circumstances in light of COVID-19.

Effective starting April 1, 2020, the following will be in effect through Dec. 31, 2020.

1. If the worker cannot perform his duties because he is relegated to a quarantine, as mandated by a medical professional or a local, state or federal government, or if he is symptomatic with COVID-19 and seeking a diagnosis to confirm it, he is entitled to as many as 80 hours of paid sick leave at his normal rate of compensation.

OR

2. The worker may be due no less than 80 hours of paid sick leave at two-thirds of the worker’s normal compensation if the individual can’t perform her work duties because of a justifiable reason to look after another person required to quarantine – be it because of a doctor’s diagnosis or by a local, state or federal government order. It can also apply to an employee if she needs to care for a minor child (younger than 18 years old), if her school or daycare center is shuttered or otherwise unable to permit the minor child to attend due to the coronavirus.

The Act also includes as many as 10 additional weeks for expanded family and medical leave, paid at two-thirds the worker’s normal wages. This can occur where the worker, who has been an employee of the business for no less than 30 calendar days, cannot work because of a justifiable reason to look after a child due to closure of a school or daycare center.

Employees of both select public employers and private businesses that have fewer than 500 employees may be eligible for the expanded family and medical leave and paid sick leave from the FFCRA. However, this may not apply to select businesses with 50 or fewer workers. For example, small businesses with less than 50 workers may be exempt from the requirement to give leave for school or child care unavailability if fulfilling the leave requirements would put the business’ ability to survive at risk.

When it comes to federal employees, it’s important to note how the FFCRA changed their situation. For federal employees subject to Title II of the Family and Medical Leave Act, they are eligible for the aforementioned provision referring to paid sick leave. However, the COVID-19 amended family and medical leave provisions in the FFCRA are not the same for federal employees.

All workers of covered employers are eligible for two weeks of paid sick time for applicable grounds due to the coronavirus. Workers on the payroll for a minimum of 30 days may have up to 10 weeks of compensated family leave to look after minor dependents, based on the individual situation caused by the coronavirus.  

When Leave May Be Permitted

Workers are qualified to receive paid sick time, according to the FFCRA, if they can’t perform their duties, including remotely, due to any of the following circumstances.

  1. Under a local, state or federal quarantine or isolation mandate due to the coronavirus.
  2. A medical professional has recommended a patient quarantine himself because of COVID-19.
  3. An individual is symptomatic consistent with COVID-19 and seeking a medical opinion.
  4. The worker is caring for another person in either category 1 or 2.
  5. The employee is caring for a child whose school or daycare facility is shuttered or otherwise inaccessible due to the coronavirus.
  6. A worker is facing an almost identical condition detailed by the Secretary of Health and Human Services, in consultation with the Secretaries of Labor and Treasury.

Workers, also in the FFCRA, are eligible for expanded family leave if they are looking after a child whose learning center or daycare is shuttered or otherwise inaccessible because of COVID-19.

When it comes to categories 1, 4 or 6, full-time workers are qualified to have 80 hours of leave. Part-time workers are eligible for calculated leave based upon an average of a 14-day time-frame.

For category 5, full-time workers are eligible for as many as 12 weeks of leave. This consists of two weeks of paid sick leave and an additional 10 weeks that are paid expanded family and medical leave – all 12 weeks at 40 hours per week.

When it comes to paid sick time under the FFCRA, it doesn’t carry over to the following year. Also, workers may not be compensated for untaken leave if they retire, leave voluntarily or involuntarily or otherwise are no longer with their employer.

For the first three categories, workers on leave qualify for compensation at their normal rate or the prevailing minimum wage over a 14-day period, whichever rate is more.

For categories 4 and 6, workers on leave qualify for two-thirds of their normal compensation or the prevailing minimum wage, whichever rate is more (no more than $200 a day or $2,000 per two-week period).

For the fifth category, workers taking leave similarly qualify for two-thirds of their normal compensation or the prevailing minimum wage, whichever rate is more (no more than $200 per day or $2,000 over two weeks).

While each organization must do its due diligence to see how the law applies to its employees, this law gives businesses and workers more flexibility to balance work and family responsibilities.

Hiring in the Age of Coronavirus

The U.S. job market gained 2.5 million jobs during the month of May, dropping the unemployment rate to 13.3 percent, according to the U.S. Bureau of Labor Statistics. There’s likely been a lot of rehiring, with more to come as the economy continues reopening. However, until social distancing becomes a thing of the past, hiring effectively will take some pivoting during the pandemic.

Finding Candidates Virtually

Employers looking to interview and hire candidates can take advantage of LinkedIn during the pandemic. Along with providing a branding opportunity, the platform gives businesses a hybrid social media and marketing tool. Leveraging 1st Connections on LinkedIn, participating in discussion groups, demonstrating one’s industry knowledge, or simply looking for prospective candidates are effective uses of LinkedIn.

Much of the LinkedIn user base is comprised of people looking for work, either as an employee or on a contract basis. Businesses can reach and retain an audience by distributing content through LinkedIn. Along with taking advantage of using LinkedIn advertising, sharing new content with existing followers can be direct and unimpeded. The site also provides a connection to a business webpage to start the application process, in addition to listing the job requisites on the business’s LinkedIn profile.   

A good way to engage applicants virtually is by encouraging interested candidates to produce one-way video interviews through digital and social media requests that they can record on their own, detailing experience, education, etc. Then hiring managers can review these submitted videos remotely on their own time and arrange initial (or additional) interviews for select candidates. Other recommendations include refreshing job postings and posting links to jobs via the company’s social media.

Safely Finding and Interviewing Candidates

Because the ongoing pandemic requires certain safety practices, such as social distancing, interviewing candidates in-person might not be practical or safe. Instead, conducting interviews remotely is the next best thing. Speak with candidates over real-time video conferencing, such as Zoom or Skype.

A survey from Gartner found that 48 percent of employees will work at least some portion of the time remotely, post COVID-19. This is compared to 3 in 10 workers who performed some of their work remotely pre-pandemic. Gartner has a few ideas on how Human Resources professionals can on-board employees virtually to increase efficiency and optimize their performance.

Another way to help employees is to recommend different modes of communication. For example, if there are too many email exchanges when working on a project, it might be more effective to hold a brief virtual meeting.

When working remotely, especially for the long-term, employees might not have adequate technology at home. It might sound intuitive, but if the company is dropping off/sending laptops/phones/microphones to remote workers, they must first ensure that all software and apps are downloaded and working. While this may be a one-time use of time for employees, it’s an important point to reduce distractions for workers when they could be spending their time on productive work. As the University of California-Irvine found, it can take 23 minutes for someone to refocus their attention after being distracted. This shows just how destructive distractions are to workers, especially when they are working remotely and in a less structured environment.

Onboarding Recommendations During COVID-19

While the following recommendations are applicable for remote workers, they can be helpful even if there are employees in the office when social distancing is in force.

Leveraging video for new employees is a useful approach. Along with taking advantage of non-verbal language, this will help share information, schedule meetings, and build trust by facilitating the ability to ask questions. Video can be a good introductory meeting, with a follow-up email that provides links to resources, how-to guides, etc. Depending on how people learn, these resources will reinforce their knowledge.

While each organization will have different needs for work arrangements during the COVID-19 pandemic, businesses can use technology to work safely and efficiently during these times to maintain business continuity.

Sources

https://www.forbes.com/sites/vickyvalet/2020/03/12/working-from-home-during-the-coronavirus-pandemic-what-you-need-to-know/#5615d77d1421

https://www.bls.gov/news.release/empsit.nr0.htm

https://www.gartner.com/smarterwithgartner/9-tips-for-managing-remote-employees/

https://business.linkedin.com/marketing-solutions/blog/best-practices–thought-leadership/2016/5-free-ways-to-build-your-personal-brand-on-linkedin

Understanding the Federal Government’s Proposal for Opening Up Again

After seeing a peak and then a sustained decline in coronavirus cases, hospitalizations, and deaths resulting from COVID-19, the White House and the Centers for Disease Control and Prevention has rolled out a three-tier approach to get the nation back to its pre-coronavirus economic activities.

While this program is led by the Federal Government, it is ultimately up to governors how they will reopen states and localities. However, there are some universal criteria that states must follow to gradually reopen the economy.   

Before transitioning from the stay-at-home orders to the three phases, certain criteria must be met. In order to move to less restrictive phases, there must be a dropping trend of documented cases over 14 continuous days or a downward trajectory of positive tests as a percent of total tests over 14 continuous days, according to guidelines set out by the White House and the CDC. Once the initial gating criteria are met, the local government can move into phase one.

Phase One

This stage will permit establishments such as places of worship, movie theaters, restaurants, and sporting arenas to reopen if they abide by strict social distancing guidelines. Along with recommending stringent sanitation guidelines for permitted establishments to reopen, this phase also suggests telework for employees and minimizing nonessential travel.

Phase Two

Schools, daycare centers, and camps (and similar events) could resume, along with nonessential travel. Establishments permitted to reopen in phase one can remain open and are now permitted to relax their physical distancing to a moderate level. Bars can start reopening, with diminished standing-room occupancy, and gyms can stay open with strict distancing and sanitation protocols.   

Phase Three

This phase would come into force when the state and/or locality has no evidence of a relapse. Worksites would see normal staff protocols without restrictions. Large establishments will be able to function under limited social distancing protocols; gyms will operate with standard sanitation protocols; and bars would be able to run with increased standing room occupancy.

As states across the country are reopening, there are many preparations that businesses can implement to stay compliant with government mandates, including re-integrating their workforce and encouraging customers to return to establishments.

Sanitation

Along with social distancing, maintaining sanitation is equally important. Encouraging workers to wash their hands at every available opportunity, including upon arriving at work; before and after eating; after touching doors, desks, keyboards, and other materials; using the restrooms, etc.

Cleaning

Whether it’s an office environment or a retail/restaurant establishment, cleaning surfaces at least once a day is recommended, but more often for surfaces that are touched or used during the course of business. Examples of items to sanitize regularly throughout the day include handles, tables, elevator buttons, sinks, registers, and point of sale terminals.    

Signage

Reminding employees and visitors to go home if they have symptoms or have been exposed to the coronavirus through signage is recommended. A protocol to contact the front office based on these circumstances should be implemented.

Encouraging Telework

Identifying tasks suitable for telecommuting versus in-office is helpful for task completion, as well as promoting social distancing. Look at the perspective of work from two buckets – solitary or collaborative – and telecommuting and office time can be split accordingly. If an employee is tasked with writing reports, performing research, or calling experts, he or she could easily work from home. While collaborative work can be done remotely, it is better to be done at the office.

Other Considerations

Along with face masks, there are other ways to reduce the potential for coronavirus transmission. Offices and other establishments can have fewer seats in common rooms, using tape to mark 6 feet or more of distance. When it comes to hallways, one way to stop face-to-face exposure is to have one-way corridors. While it might create longer days, staggering shifts to reduce the number of people in the office and rearranging breaks would also reduce unnecessary employee-to-employee interactions.

Ditching cash as an accepted form of payment is another way to reduce the likelihood of coming into contact with the coronavirus on currency, along with encouraging social distancing since cash doesn’t need to be exchanged. Using online/digital payments or credit cards only is one way to accomplish this. Using designated entrances for workers (or customers), coupled with designated entrances and exits can help reduce opposing traffic and people meeting face-to-face.  

While research continues to create a vaccine and render the coronavirus harmless, until that happens, businesses have many tools to reopen their businesses for the foreseeable future.

Sources

https://www.whitehouse.gov/openingamerica/

Understanding the High-Low Method

Cost Accounting High-Low MethodWhen it comes to cost accounting, the high-low method is an approach that’s used to break mixed costs into either a variable or fixed cost. Although it’s straightforward, it’s important to do multiple analyses because outlier costs from the available data can sometimes misconstrue operating costs. This calculation occurs by looking at the periods with the most and least activity, as well as the total costs for both the high and low periods.

In order to get results for the high-low method, the variable cost and the fixed cost must be determined first. Once these are established, they are entered into the cost model formula.

Variable Cost is determined as follows:

VC = Highest Activity Cost – Lowest Activity Cost / Highest Activity Units – Lowest Activity Units

The next step is to calculate the Fixed Cost as follows:

FC = Highest Activity Cost – (VC x Highest Activity Units)

Now that the fixed and variable costs are known, the high-low cost can be determined:

High-Low Cost Model = Fixed Cost + (Variable Cost x Unit Activity)

Understanding it Through a Real-World Example

Looking at a furniture manufacturer, it’s good to focus on one product to see how the high-low method works:

The first step is to list production that includes each month, the product produced (let’s say it’s tables), and how much it cost to produce all tables each month. The list could be as follows:

Months Units Produced Total Cost ($)
January 153 6,650
February 106 5,653
March 120 6,185
April 126 6,120
May 100 4,888
June 133 6,650
July 113 5,852
August 93 4,988
September 153 6,783
October 166 7,382
November 146 6,783
December 160 7,581

The greatest output or activity for the furniture store happened in October when it produced the highest number of tables: 166 at a cost of $7,382. In August, the furniture store produced the fewest number of tables at 93, manufactured at a cost of $4,988.

Even though the cost may not be the greatest for the peak and valley of production, the corresponding costs for those respective figures is what will be used.

Now that we’ve identified the relevant data, the first task is to determine the variable cost.

VC = Total Cost of High Activity – Total Cost of Low Activity / Highest Activity Unit – Lowest Activity Unit

VC = $7,382 – $4,988 / 166 – 93  

VC = $2,394 / 73 = $32.80 per table

Then fixed costs must be calculated:

Total Cost = (VC x Units Produced) + Total Fixed Cost

$7,382 = ($32.80 x 166) + TFC

$7,382 = $5,444.80 + TFC

TFC = $7,382 – $5,444.80 = $1,937.20

It’s important to remember that variable costs are per unit.

Now that we have the total fixed cost, we can then create the total cost equation:

Total Cost = Total Fixed Cost + (VC x Units Produced)

Total Cost = $1,937.20 + ($32.80 x 166) = $7,382

This demonstrates the comprehensive costs for the tables made by the furniture store.

Further Considerations

The high-low method is a quick way to analyze costs. Since it only necessitates the peak and lulls of production data and costs, it can be done more often, along with helping companies plan with limited data to estimate future unit costs.

It’s important to run multiple types of cost analysis because high and low measurements might not give a full picture of costs. Although these two data points may not be the best overall picture of costs a business experiences at those volume levels, it can be an effective measurement until more data becomes available.

CARES Act – Coronavirus Aid, Relief, and Economic Security Act

U.S. Government Provides Relief to Individuals, Businesses in Midst of COVID-19 Crisis

On March 27, President Donald Trump signed into law a historic $2 trillion stimulus package designed to provide economic relief to individuals and businesses affected by the coronavirus pandemic.

Our aim in this alert is to give a brief overview of both the tax and non-tax provisions of the government’s new stimulus legislation, including what type of assistance is available for individuals and businesses, how to apply for it, and what to do if you become unemployed. The summary is divided into two sections, one for individuals and one for businesses.

Individual Provisions

Stimulus Payments: Amounts and Eligibility

  • Most adults will receive $1,200; each qualifying child under 16 years old will receive $500.
    • The amount you receive is based on your tax filing status and reported adjusted gross income (AGI).
      • Single filers with an AGI of $75k or less will receive the full $1,200; with a full phase-out at $99k
      • Married filers with an AGI of $150k or less will receive the full $2,400; with a full phase-out at $198k
      • Heads of households with an AGI of $112.5k or less will receive the full $1,200
  • Having qualifying children will increase the phase-out threshold slightly for all groups
  • Those claimed as a dependent by another taxpayer will not receive any stimulus money
  • Recipients need to have a legitimate Social Security number to receive payment, except for military members
  • Currently there is only one stimulus payment scheduled; however, there has been discussion of additional future payments

Proof of Income

  • If prepared, your 2019 tax return is the basis of your eligibility; if not, use your return from 2018
  • If you still have not filed for 2018, you can use a 2019 statement from the Social Security administration as proof of income to qualify

Applying for the Payment and Receipt

  • If the IRS has your bank information from prior tax filings, then you don’t need to do anything. The money will simply be direct deposited into your account based on already filed income tax information
  • Most people should expect to receive the money approximately three weeks from the bill’s passage date

Other Considerations

  • Unemployed persons are eligible to receive payments
  • You will not need to pay income tax on these payments
  • Generally, this payment is exempt from all forms of wage garnishment; however, not in all cases for child support garnishments

Unemployment Benefits: Who is Covered?

  • The bill expands eligibility for unemployment benefits, including part-time and self-employed workers
  • Self-employed persons are newly eligible for unemployment benefits and their benefit is calculated based on previous income using a formula from the Disaster Unemployment Assistance program
  • Part-time worker benefits are state dependent

Amount of the Benefit

  • Unemployment benefits still vary by state, but generally the bill aims to compensate for the average worker’s paycheck by providing extra payments to cover the gap between traditional state unemployment and actual wages
  • Eligible workers can get as much as $600 per week in addition to their state benefit; this includes self-employed and part-time workers
  • States are free to pay the whole amount at once or send the top-up portion separately

How Long Will It Last?

  • The bill provides an additional 13 weeks on top of whatever each state already provides; however, unemployment benefits cannot last more than 39 weeks total
    • Those already receiving unemployment benefits are still eligible for the 13-week benefit extension as well as the $600 weekly benefit top-up
  • The incremental $600 payment is only good for up to four months, through the end of July

Other Considerations

  • Coverage also extends to those who can’t work because they are required to self-quarantine and people unable to travel to work because of imposed quarantine restrictions
  • If the main household earner dies as result of the coronavirus, the survivor is eligible for their unemployment benefit
  • People who can work from home or are already receiving paid sick or family leave are not eligible

Student Loans

  • For six months (April 2020 to September 2020) there is an automatic suspension of student loan payments for loans held by the federal government (private loans excluded)
    • You may choose to keep paying down the principal if you desire

Retirement Account Rule Changes

  • For 2020, the minimum distribution requirements on IRAs, 401(k), 403(b) plans, etc. are suspended
    • This is not applicable to pensions
  • Up to $100k may be withdrawn early without being subject to the typical 10 percent early withdrawal penalty; and income taxes owed on withdrawals may be spread over three years from the date of distribution
    • To qualify for these exemptions, you need to prove the need was related to the COVID-19 outbreak, which includes if you, your spouse or a dependent tested positive for the virus or if you suffered adverse economic costs due to the COVID-19 crisis
  • Loan limits on workplace retirement plans (401k, etc.) are doubled, allowing participants to take loans of as much as $100k if they can prove they’ve been affected by the pandemic

Charitable Contributions

  • The bill creates a new charitable deduction of up to $300 available for those who can’t itemize their deductions for donations to qualified charities
  • The limit on charitable deductions (those that are itemized) are increased, allowing donors to deduct up to 100 percent of donations against 2020 AGI. For example, if you have $1.3 million in income, you can donate $1.3 million and deduct the entire amount
    • Only cash gifts to public charities qualify; you cannot donate stocks or gift via private foundations to be eligible

Miscellaneous Provisions: Renter’s Relief

  • The law puts a temporary 120-day nationwide stop to evictions if the landlord has a mortgage from a governmental agency, such as Fannie Mae, Freddie Mac and others. Additionally, landlords are not allowed to charge penalties for delinquencies during this period.

Business Provisions

Charitable Deductions

  • The 10 percent limitation on charitable donations is increased to 25 percent of taxable income

Qualified Property Improvements

  • Businesses will have the option to write off costs that are typically only depreciable over a 30-year period, especially businesses in the hospitality industry

Small Business Administration (SBA) Loans

  • Small businesses and non-profits that have 500 employees (full- and part-time) or fewer are eligible to receive SBA loans of up to $10 million
  • The loans may be used to cover the cost of payroll, paid leave, group health benefits, mortgage and rent payments, utilities and interest on other debts
  • No collateral or personal guarantees are required

Employee Retention Credit

  • Employers are eligible for a payroll tax credit of up to 50 percent of wages paid during the COVID-19 crisis, which is defined as March 13, 2020, through the end of the year, up to a maximum credit of $5,000 per employee
  • The credit is limited to employers whose operations have been suspended due to the virus outbreak or whose gross receipts have fallen by more than 50 percent compared to the same quarter in the prior year

Payroll Tax Deferral

  • Employers can defer their 6.2 percent portion of the FICA tax (Social Security portion only), delaying payment over two years with 50 percent due in 2021 and the other 50 percent due by 2022.

Net Operating Loss (NOL) Changes

  • The Tax Cuts and Jobs Act disallowed the carryback of NOL completely; and before this in 2018, only a two-year carryback was allowed. This bill allows a five-year carryback for losses from 2018, 2019 and 2020; and taxpayers can amend prior year’s returns as well.
  • The 80 percent limit on NOLs for these same years is removed, allowing a 100 percent reduction in taxable income.

Business Interest Expense Deductions

  • Business interest that falls under Section 163(j) gets an increased deduction limit from 30 percent to 50 percent of taxable income for 2019 and 2020.
  • 2019 taxable income can be used to calculate the interest limitation for 2020 if it’s more favorable
    • The above is not applicable to partnerships

4 Common Liquidity Ratios in Accounting

One way a business can manage its books and viability in the near and long terms is to see how liquid its assets are. Businesses that have better cash positions are naturally geared toward sustaining continued success. One important reason for a business to measure and maintain healthy levels of liquidity is because it promotes better odds that a company will be able to satisfy its short-term debts. There are many ways a business can accomplish this, and below are four common ways it can be done.  

Current Ratio

One of the few liquidity ratios is what’s known as the current ratio. It’s a way to determine how well a company can pay back its debts.

The current ratio is also known as the “working capital ratio,” showing how well a business can satisfy financial obligations that must be paid back within 12 months. Using an example is a good way to see how it works:

Let’s assume a company has the following assets, it would use the following ratio:

Current Ratio = Current Assets / Current Liabilities

Marketable Securities such as stocks, bonds or purchase agreements maturing in 12 months or less can be considered a current asset. Businesses may also consider cash, accounts receivable, prepaid expenses, office supplies and saleable inventory they have in stock as current assets.

Outstanding bills or accounts payable and short-term debt – within the next 12 months as described above – are considered current liabilities. Other expenses can be interest payable, income and payroll taxes payable, which can also be considered current liabilities.

If the current assets of a business are $250 million, and that is divided by current liabilities of $75 million, the Current Ratio would be 250 / 75, or 3.33

With a current ratio of 3.33, the company is in good financial health because it can pay off its debts easily.

Acid-Test Ratio

The Acid-Test Ratio determines how capable a company is of paying off its short-term liabilities with assets easily convertible to cash.

Also known as the quick ratio, the formula is as follows:

Acid-Test Ratio = Current Assets – Inventories / Current Liabilities

Current assets consist of cash and similar assets (savings/checking accounts, deposits becoming liquid in three months or less), marketable securities and accounts receivable. From there, the summation is divided by the company’s current liabilities expected to be paid in 12 months.

The other way to calculate the acid-test ratio or quick ratio is as follows:

The first step is to look at the company’s current assets that can be liquidated within 12 months. Then inventory must be valued – that which is intended to be sold for purchase. From there, the inventory value is subtracted from the current assets. The resulting value is then divided by the business’ current liabilities.

The acid-test ratio is one way to determine a company’s ability to satisfy current liabilities without selling inventory or getting more lending. With the uncertainty and profitability of selling inventory, one can argue that it gives a better picture of a company’s financial fitness.   

For example, if a company comes out with a ratio of 3, this means that a business has $3 for every $1 of liabilities. However, as a company’s quick ratio increases, it might show there’s too much money not being reinvested to increase the company’s efficiency and profitability. A higher quick ratio figure can also indicate that there are too many accounts receivable that are owed but uncollected by the company.

Cash Ratio

As the name implies, the cash ratio determines how financially able a company is to satisfy short-term liabilities with cash and cash equivalents.

Also referred to as the cash asset ratio, this tells how capable a business is of satisfying short-term debts, usually 12 months or less, with cash and cash equivalents only. This ratio is as follows:

Cash Ratio = Cash and Cash Equivalents / Current Liabilities

Examples of cash and cash equivalents include physical currency, minted coins, and checks. Cash equivalents include money market accounts, Treasury bills and anything that can be converted into cash in almost real-time.

When it comes to current liabilities, accrued liabilities, short-term debts and accounts payable are examples that are due within one year.      

From there, the ratio is as follows to determine a company’s cash asset ratio:

Cash and Cash Equivalents (Cash: $25,000 + Cash Equivalents: $100,000) / Liabilities (Accounts Payable: $30,000 + Short-term debt: $25,000)

$125,000 / $55,000 = 2.27

Based on this calculation, the company would be able to pay off 227 percent of present liabilities with its cash and/or cash equivalents. For creditors and investors evaluating a company, it can show the company has ample liquidity. Creditors are naturally more willing to lend to companies with more cash flow; and investors are interested to see how liquidity is being managed.

Operating Cash Flow Ratio

This ratio measures how efficiently a business can meet present liabilities from the cash flow of its core business operations. It tells a company the number of times over it can satisfy its liabilities based on the amount of cash it generated over a certain time-frame.

This ratio can also include accruals, giving a fair estimate of a business’s short-term liquidity. The formula to determine this ratio is as follows:

Operating Cash Flow Ratio = Cash Flow from Operations / Current Liabilities

The statement of cash flow is where the operation’s cash flow is found. It can also be calculated by determining a company’s net income, plus non-cash expenses, plus working capital changes.

Current liabilities are defined as financial obligations due within the next 12 months. Common ones are accrued liabilities, accounts payable and/or short-term debt.

Once the operating cash flow ratio is calculated, a company’s financial health can be determined. If the ratio is 1.5 or 2, for example, it means the company can cover 1.5 times or double its present liabilities. However, if the ratio is less than 1, then the amount of cash generated from operations is insufficient to satisfy short-term liabilities.

As part of a comprehensive accounting practice, businesses that run these ratio calculations will be able to identify where there’s too little or too much liquidity and reduce current and future financial peril.

LIFO Versus FIFO and How Each Method Values Inventory

As the name implies, First-In, First-Out (FIFO) is a way for companies to value their inventory. The first items put into inventory or produced by the company are accordingly the first taken out of inventory or transferred to customers and therefore expensed. When it comes to accounting for acquisition and/or production costs, initial and earlier costs are the first to be expensed, with more recent costs staying on the balance sheet to be expensed later.

Assume a company already has 200 widgets costing $4/widget. From there, the company increased its inventory at three more times during a selected accounting period. Three hypothetical, additional purchases include:

200 widgets @ $6/widget

200 widgets @ $7/widget

200 widgets @ $8/widget

If the company had 500 widgets purchased, there would be different considerations be it FIFO or LIFO. First, we’ll discuss FIFO.

For the 500 widgets sold to customers, the FIFO’s Cost of Goods Sold (COGS) (assuming there are no additional inputs that would increase the COGS for simplicity sake) would be $2,700.

This calculation will look at how COGS works for FIFO:

200 initial widgets costing $4/widget = $800 in COGS  

200 widgets from the first additional purchase, costing $6/widget = $1,200 in COGS

100 widgets from the second additional purchase, costing $7/widget = $700 in COGS

For a total of $2,700 in COGS

Assuming there were no purchases during the selected accounting period, there would be 300 widgets remaining in inventory, or $3,000 in inventory costs. The inventory would show up on the balance sheet, according to the following calculation:

200 widgets @ $7/widget = $1,400 in inventory

200 widgets @ $8/widget = $1,600 in inventory

Now this is compared to LIFO, or Last-In, First-Out, which accounts for expenses by looking at most recent costs first. With the same company selling the same 500 widgets in the same accounting time-frame, but expensing their most recent 500 widgets first, here is the rundown:

200 widgets @ $8/widget = $1,600 in COGS

200 widgets @ $7/widget = $1,400 in COGS

100 widgets @ $6/widget = $600 in COGS

For a total of $3,600 expensed

The inventory would be left as the following:

100 widgets @ $6/widget = $600

200 widgets @ $4/widget = $800

For a total of $1,400 in remaining inventory.

Considerations Between LIFO and FIFO

One important consideration when choosing between LIFO or FIFO is that more likely than not input costs rise over time. Therefore, valuations can change based on the type of method.

Looking at the LIFO method, taking out inventory that’s been produced most recently does not always reflect market prices of the remaining inventory, especially if remaining stock is a few years old. Along with Costs of Goods Sold lowering net income, if older inventory is obsolete and it can’t be sold, it’ll render the inventory’s value far below market prices.

When it comes to the FIFO method, you get a better indication of the remaining inventory’s value. However, using this method increases a business’ net income since remaining inventory can be older and is valued by the Cost of Goods Sold. Similarly, if net income increases, there’s also a good chance of greater tax obligations for the company.

These scenarios account for rising prices. However, if prices are falling, then these scenarios would be reversed.

When Full Costing Accounting Makes Sense

With more than 1.4 million accounting jobs in 2018, according to the Bureau of Labor Statistics, there are many different uses for accountants and their skills. With the need for accuracy and transparency in private and public accounting, one important concept to explore is absorption, or full costing.

Absorption or full costing is an accounting method that is used by businesses to determine the complete cost of producing products or services.

When it comes to calculating the full cost, there are three main categories taken in account:

  1. Direct Costs – How much material, labor, machinery, etc. it costs to produce each product.
  2. Total Amount of Fixed Costs – Examples include monthly rent payments, tax payments, base salaries, etc. These are the types of expenses a company would incur regardless of the level of production.
  3. Total Amount of Variable Costs – If there’s increased demand for a particular product, companies would incur variable costs to meet that demand. Examples would include additional wage payments, increased electricity bills for extended or additional shifts, etc. Unlike a pre-negotiated rate for a lease, paying overtime or for more staff would vary based on changes in production needs.

It’s important to note that with absorption or full costing, regardless of the accounting period, both variable and fixed selling and administrative costs are not included when calculating cost per item. These costs are accounted for in the accounting time, whenever the expenses actually occurred or on an accrual basis.

Along with being GAAP-compliant (following Generally Accepting Accounting Principles) when it comes to absorption or full costing, the direct material costs, labor costs and variable and fixed overhead expenses are factored into the per-product cost to the point of sale. Once sold, the expenses will then be reflected on the Income Statement within the COGS fields (Costs of Good Sold).

Further Considerations and Differences with Variable Costing

The primary difference between full costing and variable costing can be seen when it comes to fixed overhead manufacturing costs.

For the absorption or full costing approach, fixed manufacturing overhead costs are recognized when the product is sold. With the variable costing method, the fixed manufacturing overhead costs are accounted for when the business incurs the expenses for that product (i.e., during production time).

Whether or not produced items are sold or still part of the business’ inventory, the absorption costing approach assigns all expenses to the inventory. This helps companies calculate their net profit more precisely. The approach to determining net profit is especially helpful if a company’s inventory is unsold after the accounting timeframe when production occurred.

When fixed costs such as insurance, salary, advertising and related expenses add up quickly and to great amounts, this is something to keep in mind when determining private performance and public perception for publicly traded companies.

Sources

https://www.bls.gov/ooh/business-and-financial/accountants-and-auditors.htm

 

Payroll Management Tips

When it comes to an employer’s responsibility for non-exempt workers, according to the U.S. Department of Labor, there are many requirements businesses must follow related to payroll. In one example, there are strict regulations on what information employers must document for each non-exempt worker. While there’s no requirement on how the information is recorded, there are three main categories.

Personal details: This should include the employee’s name, complete address, Social Security number, date of birth and gender.

Job details: This must include the worker’s job description and hours clocked in each day and week.

Pay details: The employee’s hourly wage based on straight time, and how employees are compensated – be it hourly, weekly, project or item-based. It should include the number of hours worked each week, per day or per week non-overtime earnings, overtime earnings per work week, and the compensation paid to employee for the pay period. Also included should be the day of the employee’s check, for what time period worked is described, and all deductions or increases to the worker’s wages.

Depending on the type of record, employers have different time requirements for record archival. Payroll records must be maintained for 36 months. Schedules, timecards and deduction records for employee earnings must be held for 24 months and be readily accessible for inspection by the U.S. Department of Labor.

When there is minimal deviation from an employee’s schedule, employers simply have to confirm the employee adhered to the schedule. When there is a large deviation (working fewer or more hours than normally scheduled), the actual number of hours worked should be noted. It doesn’t matter how time is kept for an employee, as long as it’s kept – be it manually written by the worker, a supervisor or HR rep or with a time clock.

Other Documentation

The IRS explains that employers are required to complete Form W-2 to maintain compliance with tip and wage payments. This should be completed and submitted by the end of the calendar year.

Employees who fill out the Form W-4 can mitigate estimated tax liability by specifying how much to have withheld from their compensation by their employer. An employee can claim exemption from federal income tax withholding if she had no income tax liability the prior year and does not expect to pay taxes in the coming year. However, the employer is still required to deduct the FICA tax for that employee.

FICA Tax

Also known as the Federal Insurance Contributions Act (FICA), employers are required to withhold two different types of taxes: Social Security and Medicare. According to the Internal Revenue Service (IRS), employers are responsible to calculate and remit these taxes based upon each employee’s wages.  

For the 2019 tax year, Social Security taxes for employer and employee are both 6.2 percent, or 12.4 percent total. This tax is limited to the first $132,900 in wages. The Medicare withholding rate is 1.45 percent of wages for both employer and employee, totaling 2.9 percent. Unlike Social Security taxes, for Medicare there’s no cap on the employee’s total salary. Additionally, for wages exceeding $200,000 for 2019, only the employee is taxed an additional 0.9 percent, in addition to the 1.45 percent (for a total of 2.35 percent of any wages exceeding $200,000 for the 2019 calendar tax year) for Medicare taxes.

Individual Estimated Taxes

Estimated Taxes are meant to satisfy many forms of taxes, and not just income tax obligations. It also includes the alternative minimum tax (AMT) and self-employment taxes. Whether it’s a single entrepreneur, a business partner or someone with equity in an S corporation, as long as they have $1,000 or greater in tax obligations, they have to pay estimated taxes, generally on a quarterly basis. When it comes to corporations, the threshold for estimated tax payments is $500 when they prepare their taxes.  In additional to taxpayers under the tax liabilities outlined above, estimated taxes are not required for individuals who meet the following: there was no tax owed for the preceding year, the individual was a U.S. citizen or resident for the entire year, and the last tax year was for 12 months. Also note that self-employed workers must pay both the employer and employee portion of the FICA tax.

Much like the evolving landscaping of the U.S. Tax Code, the world of payroll is also subject to ongoing changes that are imperative to maintaining compliance.

Sources:

https://www.dol.gov/whd/regs/compliance/whdfs21.htm

https://www.irs.gov/businesses/small-businesses-self-employed/understanding-employment-taxes

https://www.irs.gov/pub/irs-pdf/p15.pdf

https://www.irs.gov/publications/p505