Question 1
You are lucky to have won a new automobile, received a gift from a rich Aunt, won an award for literary achievement, and your employer just notified you, on the day you are retiring, that he was giving you $30,000 for your 25 years of outstanding service.
Briefly discuss:
• The tax consequences of each;
• Which result in the least amount of gross income; and
• What could be done to minimize your gross income?
Why might your employer want to consider the payment a bonus while you prefer to consider it a gift?
Respond to this...Automobile: don't you have to pay taxes on automobile already, when you claim your prize. So you
Gift from a rich Aunt: you need to know the value of the gift and under certain amount you do not have to claim it and have to pay taxes for the new automobile you just won. This would have the least amount of gross income.
An award for literary achievement: this one is same as the gift from a rich aunt because it is hard to put a value on the achievement and you get allowance for the literary achievements.
Retiring: this is considering an income and you have to pay taxes on it. this will make your gross income increase and could potentially put you in higher tax rate.
To minimize your gross income to increase, you can reject the offer or you can pay taxes at the time of exception so you won't take big impact at the end.
Question 2
The long term success of a company is depicted by the types of assets and the retained earnings of the company. The liabilities are then a direct reduction of these items. Remember that investors look at the types of assets and liabilities to determine if they will invest in a company.
How would you go about indicating to investors that all account balances are valid and free from potential errors? What types of financial records and information would you use to support your claims? Explain.
Respond to this...I would provide the investors our balance sheet. The balance sheet provides information on assets, liabilities, and stockholder's equity. The balance sheet provides a basis for computing rates of return and evaluating the capital structure of the enterprise. The investors can then analyze the information in the balance sheet to assess the company's risk and future cash flows. They can also use the balance sheet to assess the company's liquidity, solvency, and financial flexibility.
Liquidity describes the amount of time that is expected to elapse until an asset is realized or otherwise converted into cash or until a liability has to be paid. Solvency refers to the ability of a company to pay its debts as they mature. Liquidity and solvency affect a company's financial flexibility, which measures the ability of an enterprise to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities.
Balance sheets group together similar items to arrive at significant subtotals. Companies should report and classify individual items in sufficient detail to permit users to assess the amounts, timing, and uncertainty of future cash flows. Such classification also makes it easier for users to evaluate the company's liquidity, financial flexibility, profitability, and risk.
Financial records and information I would use to support my claim are cash flow statements, income statements and balance sheet. Cash flow statements show how much cash our business has on hand. Income statements show our business revenue, expenses, and income resulting in a profit or a loss. The balance sheet would show our business assets, liabilities, and equity.
Kieso, Weygandt, Warfield. (2103). Intermediate Accounting, 15th Edition. Retrieved from https://bookshelf.vitalsource.com/books/9781118722671
Question 3
Explain how the Net Present Value (NPV) and Internal Rate of Return (IRR) analyses work and how they can be used to make financial investment decisions. Provide an example of the NPV analysis.
Respond to this...NPV and IRR are two methods of evaluating an investment. NPV is a way to compare the current amount of the investment to the future cash value after they are discounted by a rate of return. The initial investment is subtracted from the sum of the present value of all future cash flows. This is done by discounting the cash flows by the rate of return of the investment. In other words, it calculates the present value of all future cash flows so they can be compared to the value of the initial investment. The NPV will either be positive, negative, or zero. A positive NPV indicates that the netted present values of future cash flows is greater than the initial investment, and therefore creates value. A negative NPV indicates that the present value of future cash flows is less than the initial investment, and therefore seen as a poor investment. In the case of a negative NPV, the company would be better off keeping the money, or directing the investment to a different opportunity.
Closely related to the NPV, IRR is an alternate method of determining the viability of an investment. The IRR is the discount rate where the present value of future cash flows is equal to the initial investment. Setting the NPV formula to zero and calculating the discount rate provides insight into the projected rate of return of the project. The IRR can be compared to the hurdle rate which is rate of return that is required to proceed with the project or investment. In many cases, a company will use its cost of capital as the hurdle rate.
NVP and IRR analysis could be used to make a decision whether or not to upgrade its manufacturing equipment. The NPV could be based on the initial cost to purchase and install the new equipment, and the projected rate of return based on savings from improved productivity over the lifetime of the equipment. IRR analysis could also be used in this scenario to determine if the rate of return is greater than their hurdle rate. In this way, a decision can be made if the project should be undertaken, or the capital used for something else.