Final answer:
The inventory costing method selected by a business affects its financial statements, with LIFO and FIFO having different impacts on cost of goods sold and profits. Explicit costs are direct payments while implicit costs are the opportunity costs of using one's own resources. Financial capital relates to profits as it fuels growth and expansion, with choices between borrowing and issuing stock.
Step-by-step explanation:
The inventory costing methods a company uses can significantly impact its financial statements. When costs are rising, using the Last In, First Out (LIFO) method will result in higher cost of goods sold (COGS) and lower profits, while the First In, First Out (FIFO) method will report lower COGS and higher profits. Conversely, when costs are falling, LIFO results in lower COGS and higher profits, whereas FIFO results in higher COGS and lower profits. These differences affect not only reported profit but also the valuation of inventory on the balance sheet.
Understanding the relationship between cost and revenue is vital for business decisions. If revenue exceeds costs, the business can make a profit. However, if costs exceed revenues, it could lead to losses. Explicit costs are direct payments made to others in the course of running a business, like wages, rent, and materials. Implicit costs, on the other hand, are the opportunity costs of using a company's own resources for internal operations instead of external income-generating activities.
Financial capital is vital because it allows businesses to invest in assets, expand operations, and develop new products, which can lead to increased profits. Companies may choose between various sources of capital, including borrowing through bonds or loans, or acquiring funds through issuing corporate stock. Each option has different implications for control, repayment, and cost of capital, which firms must consider to align with their financial strategy and operational goals.