Finance Tips

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Tags: payroll , tax , help , relief , services , Tax Preparation / Income Tax Accounting , information

Payroll is essentially how employees are paid. Its the legal paperwork involved. There’s more to payroll than just handing out cash or checks, however. After gathering data on what employees have done and comparing it to their salaries, some simple payday mathematics will let the employer hand out the dough. Right? Wrong. Its still more complicated than that; especially if all these employees belong to a large company.

Once an employee’s gross income amount or pay has been calculated based on their wages and activities; its time for deductions, bonuses, all that fun stuff. In addition to these there are tax withholdings, medical insurance, union dues, charitable contributions, etc. to be reckoned with. The money an employee will get (Lets hope its enough after all these subtractions!) is then given then, whether via check or cash. Don’t forget that some of the information coming out of payroll needs to be forwarded to the government so employees can be taxed! continue reading…

Forensic accounting is a growing field, especially in the wake of recent financial scandals. Simply put, forensic accountants go over a business or individual’s financial records and analyze them for the client’s use. Forensic accounting evidence may be called for in situations as diverse as bankruptcy, inventory falsification, divorce, statutory audits or even major fraud. After analyzing the data of the situation, the forensic accountant will then compile reports or exhibits to be used in court or in other legal proceedings, and may be called upon to testify about their findings. This aspect of the job necessitates the forensic accountant being familiar with legal procedures and knowing what parts of their findings are relevant to the case.

Forensic accountants usually begin as general accountants, since the job requires a strong background in auditing and accounting. Other qualities that employers look for in a forensic accountant are exceptional organization, the ability to be creative in working methods, curiosity about things that seem “off”, and the persistence to sift through extraneous material and the professional judgement to find what matters.

A lot of forensic accounting training is experiential and on the job. However, many countries have forensic accounting organizations that can provide certification, and some universities also offer graduate courses in forensic accounting. Most universities require at least a bachelor’s degree in accounting and sometimes a CPA certification before they will accept a student for their forensic accounting courses. Some people do study forensic accounting on their own since there are many books on the subject, but most agencies recommend taking courses to learn forensic accounting since so much of it is experience-based. Many CPA firms, universities and even police stations offer internships in forensic accounting, which is highly recommended for gaining real world experience. continue reading…

Organizations are restructuring, reinventing themselves to change their goals and their processes in order to respond appropriately to a changing environment. In this context of change and increasing competitiveness in all market segments, organizations seek productivity gains and improve their methods and management tools.

In this scenario, the audit function is increasingly intervening in the diagnosis of certain situations, including the company’s viability, efficiency and effectiveness of controls and processes, and preventing fraud and illegal acts. In this sense, the role of internal auditing has emerged as a highly developed function as a reflection of the needs and expectations of the organization as a whole to survive and thrive in the market.

The Institute of Internal Auditors defines internal audit as an activity that is independent, of objective assessment and consulting activity designed to add value and improve operations of an organization in achieving its objectives through a systematic, disciplined approach in evaluating processes effectiveness of risk management, control and governance. continue reading…

The Unresolved Flaws in Financial Accounting

The users of accounting information include company owners, managers, investors, creditors, and government agencies. It is generally acknowledged that most financial reporting is “primarily externally oriented” and most of the users are nonaccountants who get frustrated trying to understand the statements. Since they are not part of the management team, they more or less are looking from the outside in.

Despite the many accounting associations from the Accounting Principles Board to the American Institute of Certified Public Accountants to the Financial Accounting Association that established the Financial Accounting Standards Board, there continues to be alternative ways of reporting which adds to the confusion and limitations of financial reporting. continue reading…

CAPITAL EXPENDITURE

REVENUE EXPENDITURE

1. Nature of Assets purchased

Any expenditure incurred to acquire a fixed asset or in connection with installation (expenses for installation) of fixed asset is capital expenditure.

Any expenditure incurred as price of goods purchased for resale along with other necessary expenses incurred in connection with such purchase are revenue expenses.

2. Discharging Liability

A payment made by a person to discharge a capital liability is a capital expenditure

An expenditure incurred to discharge a revenue liability is revenue expenditure

3. Based on Transactions

If expenditure is incurred to acquire a source of income, it is capital expenditure e.g., purchase of patents to produce picture tubes of TV set.

An expenditure incurred to earn an income is revenue expenditure. E.g. salary, advertisement etc. continue reading…

As part of an organized global effort to reduce the inconsistent measurement of fair value and the application of impairment guidance for financial assets, FASB has taken swift action with rapid expansion of fair value accounting guidance intended to provide relevant and transparent information to users of financial statements. Similarly, IASB has developed a timeframe for increasing guidance pertaining to recognition and measurement of financial instruments. FASB and IASB collaboration on these projects is paramount due to the impending convergence towards a common, international standard of financial reporting.

While the markets’ decline appear to have leveled off through the first half of 2009, establishing fair value for certain investments and assessing asset impairment will continue to be challenging aspects of the 2009 financial statement reporting process due to new and developing pronouncements from domestic and international standard setting organizations.

The Evolution of Investment Accounting for Insurance Enterprises

In 1982, FASB issued SFAS 60, Accounting for Insurance Enterprises, which established accounting guidance specific in nature to insurance companies. SFAS 60 required that insurance companies carry fixed maturity securities at amortized cost and equity securities at fair value. Fluctuations in fair value were reflected as unrealized gains and losses within the equity component of the balance sheet, and gains and losses realized upon disposal were recognized within earnings. SFAS 60 introduced the concept of ‘other than temporary’ decline in fair value, but merely mandated that such declines be recognized as if a sale had occurred. continue reading…

Cash Discounts – Cash is King.

In the current business climate investors are moving away from fundamentals in evaluating a stock to a very detailed look at a firm’s balance sheet. One of the reasons for this paradigm shift is some companies are taking advantage of the allowance for bad debt to artificially inflate the company’s earnings. In doing so, the company’s fundamentals will continue to look strong when in actuality they have underestimated the amount of bad debt they are carrying in accounts receivable. Some businesses attempt to reduce the exposure to uncollectable debt by reducing the use of accounts receivable in general but there are cases when this is impossible. A predominate way of keeping accounts receivable to a manageable size is to offer cash discounts which benefit both the seller and buyer of a good or service.

A cash discount is a fixed percentage off of the cost of a good or service for prompt payment. For example if a painter provides a quote to paint a house for $1,000 but if the owner pays in cash at the time of service the painter will only charge $950. On the surface this situation gives the impression that the customer received a benefit from the cash discount in the amount of 5% of the quoted price but the painter received no such benefit. In fact the impression could be given that the cash discount was detrimental to the painter because the overall fee was reduced by $50. Digging deeper into the painters thought process benefits of the cash discount will become apparent. Firstly by receiving the payment in cash the painter does not have to worry about fees for a credit card transaction (2%-4%). Additionally the painter is then protected from charge backs and fraudulent credit cards due to identity theft. If the homeowner chose to finance the cost of the service then the painter would be exposed to the possibility of the homeowner not paying the debt. If this happens the painter would have to expend time in attempting to collect that debt or sell the debt to a collection agency at a loss. If the painter is paid cash at the time of transaction both of these scenarios are mitigated; there is no credit card fees to pay and there is no threat of a non paying customer. continue reading…

Unlike cash basis accounting that recognizes revenue when cash is received and expense is recognized when cash is paid, accrual accounting follows rules where revenue is recognized when earned, and expenses are recognized when they are incurred. This form of accounting conforms to generally accepted accounting principles (GAAP) and because accrual basis accounting is simply the posting of income and expenses as they occur, rather than deferring the postings until a later date, this form of accounting is the favored method by most businesses. More accurate financial evaluation of actual profitability and performance is achieved by eliminating accounting entry timing disparity. A key element of accrual accounting is the matching principle, which along with revenue recognition rules is the foundation to accrual based accounting.

The GAAP matching principle allows companies to recognize revenue, and recognition of the related expenses, as they occur. This results in a more accurate analysis of current financial records at any point during the accounting period. A representative way to illustrate this process is by looking at uncollectable accounts receivable. When a sale is recognized to a credit worthy customer the transactional entry is a debit to accounts receivable on the balance sheet, and a debit to sales on the income statement. A typical entry would be: continue reading…

Any successful business owner is constantly evaluating the performance of his or her company, comparing it with the company’s historical figures, with its industry competitors, and even with successful businesses from other industries. To complete a thorough examination of your company’s effectiveness, however, you need to look at more than just easily attainable numbers like sales, profits, and total assets. You must be able to read between the lines of your financial statements and make the seemingly inconsequential numbers accessible and comprehensible.

This massive data overload could seem staggering. Luckily, there are many well-tested ratios out there that make the task a bit less daunting. Comparative ratio analysis helps you identify and quantify your company’s strengths and weaknesses, evaluate its financial position, and understand the risks you may be taking.

As with any other form of analysis, comparative ratio techniques aren’t definitive and their results shouldn’t be viewed as gospel. Many off-the-balance-sheet factors can play a role in the success or failure of a company. But, when used in concert with various other business evaluation processes, comparative ratios are invaluable.

When performing a ratio analysis of financial statements, it is often helpful to adjust the figures to common-size numbers. To do this, change each line item on a statement to a percentage of the total. For example, on a balance sheet, each figure is shown as a percentage of total assets, and on an income statement, each item is expressed as a percentage of sales. continue reading…

Ratios are highly essential profit tools in financial analysis that help financial analysts implement plans that improve profitability, liquidity, financial structure, reordering, leverage, and interest coverage. Although ratios report mostly on past performances, they can be predictive too, and provide lead indications of potential problem areas.

Ratio analysis is primarily used to compare a company’s financial figures over a period of time, a method sometimes called trend analysis. Through trend analysis, you can identify trends, good and bad, and adjust your business practices accordingly. You can also see how your ratios stack up against other businesses, both in and out of your industry.

There are several considerations you must be aware of when comparing ratios from one financial period to another or when comparing the financial ratios of two or more companies.

• If you are making a comparative analysis of a company’s financial statements over a certain period of time, make an appropriate allowance for any changes in accounting policies that occurred during the same time span.
• When comparing your business with others in your industry, allow for any material differences in accounting policies between your company and industry norms.
• When comparing ratios from various fiscal periods or companies, inquire about the types of accounting policies used. Different accounting methods can result in a wide variety of reported figures.
• Determine whether ratios were calculated before or after adjustments were made to the balance sheet or income statement, such as non-recurring items and inventory or pro forma adjustments. In many cases, these adjustments can significantly affect the ratios.
• Carefully examine any departures from industry norms.

Ratio Analysis is a useful tool in the following aspects:

Evaluation of Liquidity: The ability of a firm to meet its short term payment commitments is called liquidity. Current Ratio and Quick Ratio help to assets the short-term solvency (liquidity) of the firm. continue reading…