I am looking a purchasing a business and review the tax returns for the last two years. Something I don't understand maybe or unless I do and they are hiding income. Here is the example. This is a resort with cabin rentals. I have there cabin rentals for 2014 and calculate they have $86K in income from rentals in 2014. Their tax return for 2014 has $91k in gross receipts. Then they deduct $23k from gross receipts for cost of goods sold. Which doesn't add up to me because with the difference of the known cabin rental($86K) and gross receipts($91K) is only ($5k). They spent $23K to make $5k which is a loss of $18k. This is similar for the last 2 years and the ending inventory is the same amount for both. What is going on?

1. I am looking a purchasing a business and review the tax returns for the last two years. Something I don't understand maybe or unless I do and they are hiding income. Here is the example. This is a resort with cabin rentals. I have there cabin rentals for 2014 and calculate they have $86K in income from rentals in 2014. Their tax return for 2014 has $91k in gross receipts. =====>>The gross profit is total revenue ,equivalent to total sales, minus the cost of goods sold ; Variable expenses, i.e., Materials used; Direct labor; Packaging; Freight in or etc are recorded as part of cost of goods sold. Variable costs are recorded as cost of goods sold. Fixed expenses are counted as operating expenses ,sometimes called selling and general administrative expenses, so your gross profit is total sales minus COGS(including VC) and then when you subtract your FC, the result’d be your taxable income , net profit.




Then they deduct $23k from gross receipts for cost of goods sold.==So say, the total revenue is $91K and the Variable Costs as COGS plus fixed expenses are $23K then the net profit amount on the return is $68K;$91K- $28K(total sales- COGS-FC)


Which doesn't add up to me because with the difference of the known cabin rental($86K) and gross receipts($91K) is only ($5k). They spent $23K to make $5k which is a loss of $18k. This is similar for the last 2 years and the ending inventory is the same amount for both. What is going on?===>I guess aslongas the amount of $23K is VC plus FC , then, the the net profit is $68K;$91K-$23K.

Okay, so say gross receipts is $91K. The difference between the $86K and the $91K may be that they got paid in advance for the next year rentals - they have to include that in 2014.

Anyway, $91K minus $23K would be your net income - net profit of $68K.

Don't forget depreciation in there. That is an expense that is spread over several years that deducts a portion of the buildings and other fixed assets. That is why there can sometimes be expenses greater than cash going out because it is a non-cash expense.