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FINANCE FOR BUSINESS-Emu Electronics & Hubbard Computer ltd

Question

Emu Electronics is an electronics manufacturer located in Box Hill, Victoria. The
company’s managing director is Shelly Chan, who inherited the company from her father.
The company originally repaired radios and other household appliances when it was
founded more than 50 years ago. Over the years, the company has expanded, and it is
now a reputable manufacturer of various specialty electronic items. Robert McCanless, a
recent MBA graduate, has been hired by the company in the finance department.
One of the major revenue-producing items manufactured by Emu Electronics is a smart
phone. Emu Electronics currently has one smart phone model on the market and sales
have been excellent. The smart phone is a unique item in that it comes in a variety of
colours and is pre-programmed to play Jimmy Barnes’s music. However, as with any
electronic item, technology changes rapidly, and the current smart phone has limited
features in comparison with newer models. Emu Electronics has spent $750 000
developing a prototype for a new smart phone that has all the features of the existing one,
but adds new features, such as Wifi Tethering. The company has spent a further $200 000
for a marketing study to determine the expected sales figures for the new smart phone.
Emu Electronics’ production manager has produced estimates of the costs associated
with manufacture of the new smart phone. Variable costs are estimated at $205 per unit
and fixed costs for the operation are expected to run at $5.1 million per year. The
estimated sales volume is 64 000 units in Year 1; 106 000 units in Year 2; 87 000 units in
Year 3; 78 000 units in Year 4; and 54 000 units in the final year. The unit price of the new
smart phone will be $485. The necessary manufacturing equipment can be purchased for
$34.5 million and will be depreciated for tax purposes over a seven-year life (straight-line
to zero). It is believed the value of the manufacturing equipment in five years’ time will be
$5.5 million.
Net working capital for the smart phones will be 20% of sales and will have to be
HI5002 Finance for Business Term 2 2016 Page 4 of 6
purchased at the end of the year. The cost of the raw materials is reflected in the variable
unit cost. Changes in NWC will first occur at the end of Year 1 based on the first year’s
sales. Emu Electronics has a 30% corporate tax rate and a 12% required return.
Shelly has asked Robert to prepare a report that answers the following questions:
QUESTIONS
1. What is the payback period of the project?
2. What is the profitability index of the project?
3. What is the IRR of the project?
4. What is the NPV of the project?
5. How sensitive is the NPV to changes in the price of the new smart phone?
6. How sensitive is the NPV to changes in the quantity sold?
7. Should Emu Electronics produce the new smart phone?
8. Suppose Emu Electronics loses sales on other models because of the introduction of
the new model. How would this affect your analysis?
Part B (20 points)
COST OF CAPITAL FOR HUBBARD COMPUTER LTD
You have recently been hired by Hubbard Computer Ltd (HCL), in its relatively new
treasury management department. HCL was founded eight years ago by Bob Hubbard
and currently operates 14 stores in the South Island of New Zealand. HCL is privately
owned by Bob and his family, and had sales of $9.7 million last year.
HCL primarily sells to in-store customers who come to the store and talk with a sales
representative. The sales representative assists the customer in determining the type of
computer and peripherals that are necessary for the individual customer’s computing
needs. After the order is taken, the customer pays for the order immediately, and the
computer is made to fill the order. Delivery of the computer averages 15 days, and it is
guaranteed in 30 days.
HCL’s growth to date has been financed by its profits. When the company had sufficient
capital, it would open a new store. Other than scouting locations, relatively little formal
HI5002 Finance for Business Term 2 2016 Page 5 of 6
analysis has been used in its capital budgeting process. Bob has just read about capital
budgeting techniques and has come to you for help. For starters, the company has never
attempted to determine its cost of capital, and Bob would like you to perform the analysis.
Since the company is privately owned, it is difficult to determine the cost of equity for the
company. Bob wants you to use the pure play approach to estimating the cost of capital
for HCL, and he has chosen Harvey Norman as a representative company. The following
steps will allow you to calculate this estimate.
QUESTIONS
1. Most publicly traded corporations are required to submit half-yearly and annual reports
to the ASX detailing the financial operations of the company over the past half-year
or year, respectively. These reports are available on the ASX website at
www.asx.com.au or in the investor section of the company’s own website. Go to the
ASX website and search for announcements made by Harvey Norman. Find the most
recent annual report or half-year report and download the report. Look on the balance
sheet to find the book value of debt and the book value of equity. If you look in the
report, you should find a section titled ‘Interest Rate Risk Management’, which will
provide a breakdown of Harvey Norman’s long-term debt.
2. To estimate the cost of equity for Harvey Norman, go to http://au.finance.yahoo.com
plus the business section of www.smh.com.au and enter the ASX code for Harvey
Norman, HVN. Follow the various links to answer the following questions—What is
the most recent stock price listed for Harvey Norman? What is the market value of
equity, or market capitalisation? How many shares does Harvey Norman have
outstanding? What is the most recent annual dividend? Can you use the dividend
discount model in this case? What is the beta for Harvey Norman? Now go back to
http://au.finance.yahoo.com and find the ‘Bonds’ link. What is the yield on
government debt? Using the historical market risk premium, what is the cost of equity
for Harvey Norman using the CAPM?
HI5002 Finance for Business Term 2 2016 Page 6 of 6
3. You now need to calculate the cost of debt for Harvey Norman. Go to
www.westpac.com.au and find the current business loan rates equivalent for each
of Harvey Norman’s debts. What is the weighted average cost of debt for Harvey
Norman using the book-value weights and the market-value weights? Does it make
a difference in this case if you use book-value weights or market-value weights?
4. You now have all the necessary information to calculate the weighted average cost of
capital for Harvey Norman. Calculate the weighted average cost of capital for Harvey
Norman using book value weights and market value weights. Assume Harvey
Norman has a 30% tax rate. Which cost of capital number is more relevant?
5. You used Harvey Norman as a pure play company to estimate the cost of capital for
HCL. Are there any potential problems with this approach in this situation?

Sample paper

Part A

Emu Electronics

Activity – Production of Smart Phones

Cost of developing a prototype          = $750,000

Marketing Research                            = $200,000

Estimates of costs for developing the Product

Variable Costs                                    = $205 per unit

Fixed Costs                                         = $5.1 Million annually

Unit Price                                            =$485

Cost of Equipment                              = $34,500,000

Life time                                             =7 years

Equipment Value in % years              =$5.5M

Net Working Capital for Smart Phones =20% Sales

Corporate Tax                                     = 30%

Rate of Return                                    = 12 %

Net Working Capital                           =20% of sales

Sales Volume

Year                Units               Cost Per Unit  ($)        Total Sales ($)

1                      64,000             485                              31,040,000

2                      106,000           485                              51,410,000

3                      87,000             485                              42,195,000

4                      78,000             485                              37,830,000

5                      54,000             485                              26,190,000

 

 

 

1). Payback Period of the Project (PBP)

It is the amount for time taken before an investment repays itself in terms of returns. A shorter PBP is preferred due to a low risk compared to projects with high PBP.

PBP = Investment required for a project/Net annual cash inflow

Net Annual Cash Flows

The Initial Cash for the equipment is $34,500,000

Net Annual Cash Flow

Year 1

Sales                                                                            31,040,000

Less

Fixed Costs                             (5,100,000)

Variable Costs                        (13,120,000)                (18,220,000)

Net Annual Cash Flows                                              12,820,000

Year 2

Sales                                                                            51,541,000

Less

Fixed Costs                             (5,100,000)

Variable Costs                        (21,730,000)                (26,830,000)

Net Annual Cash Flows                                              24,580,000

Year 3

Sales                                                                            31,040,000

Less

Fixed Costs                             (5,100,000)

Variable Costs                        (17,835,000)                (22,935,000)

Net Annual Cash Flows                                              19,260,000

 

Year 4

Sales                                                                            37,830,000

Less

Fixed Costs                             (5,100,000)

Variable Costs                        (15,990,000)                (21,090,000)

Net Annual Cash Flows                                              16,740,000

Year 5

Sales                                                                            26,190,000

Less

Fixed Costs                             (5,100,000)

Variable Costs                        (1,107,000)                  (16,170,000)

Net Annual Cash Flows                                              10,020,000

 

Year                Net Cash Flow                        Cumulative Net Cash Flows

1                      12,820,000                              12,820,000

2                      24,580,000                              37,400,000

 

Payback period = Y + (A / B) where

Y = the number of years before the payback year. In the example, Y = 2.0 years.

A = Total remaining to be paid back at the start of the breakeven year. This is the amount that brings cumulative cash flow to 0. In the example, A = $9,920,000.

B = Total (net) cash inflow in the entire payback year. In the example B = 37,400.

 

 

2+ (9,920,000/37,400,000) = 2.2652years or 2 years and 3 months.

2). Profitability Index of the Project

The profitability index is also referred to as the PI Ratio or the profit investment ratio. It is computed as the present value of the cash flows.

Formulae for Profitability Index

Present Value of Future Cash Flows
Initial Investment Required
= 1 + Net Present Value
Initial Investment Required

 

Project cash flows

Year                            $

  • (34,500,000)
  • 12,820,000
  • 24,580,000
  • 19,260,000
  • 16,740,000
  • 10,020,000

 

Discounting cash flows

Year

0                            (34,500,000)/ (1+0.2) ^0 = (34,500,000)

1                            (12,820,000)/ (1+0.2) ^1 = 10,683,333

2                            (24,580,000)/ (1+0.2) ^2 = 17,069,444

3                            (19,260,000)/ (1+0.2) ^3 = 11,145,333

4                            (16,740,000)/ (1+0.2) ^4 = 8,072,916

5                            (10,020,000)/ (1+0.2) ^5 = 4,026,813

 

 

Discounting compute and analyze what an amount of cash is worth today. This takes into consideration the rate of return required. For example, the 4th cash flow of $16,740,000 has a present value of $8,072,916 today. Thus, if we had an opportunity to buy $16,740,000 in cash 4 years from now, we could pay no more than $8,072,000 for that cash flow to get a 12% annual return on our $8,072,000 investment.

After calculating a present value for cash flow for each year, the next step is to sum up all of their present values. After adding up all 6 cash flows from the initial -$34.5M outlay to the 5th year’s present value of $4.026M, we arrive at a net present value of the project of $16,497,839

The NPV is positive, so we should adopt the smartphone with the new features. We will generate a return that is greater than 12% per year as the NPV is positive. If the NPV were negative, we would know that the project generates a return of less than 12% annually. If the NPV were $0, then the project is projected to produce a return equal to our discount rate, or 12% per year.

Calculating profitability index of the project

The next step is to use the data from the net present value calculation to conclude and define the profitability index for the venture.

The profitability index is calculated with the following formula:

Profitability index = present value of future cash flows / initial investment

The calculation of profitability index we need the present value of the future cash flows only calculated net present value. To get the present value of all the future cash flows, we can add up the present values of the cash flows that occur from Year 1 to Year 5 and get $50,997,839. Alternatively, we can simply add the $34,500,000 original investment back to the NPV we calculated earlier ($16,497,839) to get $50,997,839. Either way, you get the same value.

This figure, $50,997,839, goes into the numerator. We originally invested $34,500,000 into the project, so that goes into the denominator.

Thus, the profitability index is:

$50,997,839 / $34,500,000

=1.4782

3). IRR of the Project

CF0 =CF1/(1+r)^1+ CF2/(1+r)^2+ CF3/(1+r)^3+ CF4/(1+r)^4+ CF5/(1+r)^5

Year 1             Year 2             Year 3             Year 4             Year 5

34,500,000 = 12,820,000        24,580,000      19,260,000      16,740,000      10,020,000

Discount @10% (1.1)             (1.21)               (1.331)             (1.4641)           (1.61051)

Value               11,654,545      20,314,049      14,470,323      11,433,645      6,216,312

Total = 64,088,874

34,500,000 = 12,820,000        24,580,000      19,260,000      16,740,000      10,020,000

Discount @ 20% (1.2)            (1.2) ^2           (1.2) ^3           (1.2) ^4           (1.2) ^5

1.44                 1.728               2.0736             2.48832

Value               10,683,333      17,069,444      11,145,833      8,072,916        4,026,813

Total                                        40,315,006

34,500,000 = 12,820,000        24,580,000      19,260,000      16,740,000      10,020,000

Discount @ 40% (1.4)            (1.4) ^2           (1.4) ^3           (1.4) ^4           (1.4) ^5

1.96                 2.744               3.8416             5.37824

9,157,143        12,540,816      7,018,950        4,357,559        1,863,063

Total                            34,937,531

34,500,000 – 34,937,531 = 437,531 is almost equal to 0

The IRR can be said to be 40%

4). NPV of the Project

Year                            1                                  2                      3                      4                      5

Revenue Inflows         31,040,000      51,410,000      42,195,000      37,830,000      26,190,000

Cash outflows

Fixed Cost                  (5,100,000)      (5,100,000)      (5,100,000)      (5,100,000)      (5,100,000)

Variable costs             (13,120,000)    (21,730,000)    (17,835,000)    (15,990,000)    (1,107,000)

Before tax net cash flows 12,820,000 24,580,000     19,260,000      16,740,000      10,020,000

Depreciation                (4,928,571)     (4,928,571)      (4,928,571)      (4,928,571)      (4,928,571)

Income before taxes    7,891,429        19,651,429      14,331,429      11,811,429      5,091,429

Taxes at 30%              2,354,743        5,895,429        4,299,429        3,543,429        1,527,429

After tax Income         5,535,686        13,756,000      10,032,000      8,268,000        3,564,000

Add: depreciation       4,928,571        4,928,571        4,928,571        4,928,571        4,928,571

After tax cash flows    10,464,257      18,684,571      14,960,571      13,196,571      8,492,571

After tax salvage         0                      0                                  0                      0          5,500,000

After cash total NCF   10,464,257      18,684,571      14,960,571      13,196,571      13,992,571

Discounting rate @ 12 % 1.12            1.2544             1.404928         1.57351936     1.762341

PV of cash flows         9,343,087        14,895,226      10,648,634      8,386,659        7,939,763

Total value of cash flows = 51,213,369

NPV = Present Value – Initial Outlay

NPV = 51,213,369 – 34,500,000

= $16,713,369

5). How sensitive is the NPV to changes in the price of smartphone

In order to check on the risk linked to change in price of the novel smartphone, a sensitivity analysis must be calculated. To stimulate a decrease in the price of the phone as a result of market competition, the price of smartphone can be changed to $450 and recalculate the NPV.

Price of phone at $450 NPV is:

Year                            1                                  2                      3                      4                      5

Revenue Inflows         28,800,000      47,700,000      39,150,000      35,100,000      24,300,000

Cash outflows

Fixed Cost                  (5,100,000)      (5,100,000)      (5,100,000)      (5,100,000)      (5,100,000)

Variable costs             (13,120,000)    (20,870,000)    (17,835,000)    (15,990,000)    (1,107,000)

Before tax net cash flows 9,780,000 16,215,000       16,215,000      14,010,000      18,093,000

Depreciation                (4,928,571)     (4,928,571)      (4,928,571)      (4,928,571)      (4,928,571)

Income before taxes    4,851,429        11,196,429      11,196,429      9,081,429        13,164,429

Taxes at 30%              (1,455,429)      (3,358,929)      (3,358,929)     (2,724,429)      (3,949,329)

After tax Income         3,396,000        7,837,500        7,837,500        6,357,000        9,215,100

Add: depreciation       4,928,571        4,928,571        4,928,571        4,928,571        4,928,571

After tax cash flows    8,324,571        12,766,071      12,766,071      13,196,571      14,143,671

After tax salvage         0                      0                                  0                      0          5,500,000

After cash total NCF   8,324,571        12,766,071      12,766,071      13,196,571      19,643,671

Discounting rate @ 12 % 1.12            1.2544             1.404928         1.57351936     1.762341

PV of cash flows         7,432,653        9,086,637        9,086,637        8,386,659        11,146,351

Total value of cash flows = $45,138,937

NPV = Present Value – Initial Outlay

NPV = 45,138,937 – 34,500,000

= $10,638,937

The new NPV is $10,638,937 from $16,713,369. That is a reduction of $ 6,074,432. In conclusion, change in price is sensitive and carries a high risk

6). How sensitive is the NPV to changes in the quantity produced of smartphone

We can decrease the amount of units produced by and recalculate the NPV.

Year                (output)

  • 60,000
  • 100,000
  • 85,000
  • 70,000
  • 50,000

NPV after quantity reduction

Year                            1                                  2                      3                      4                      5

Revenue Inflows         29,100,000      48,500,000      41,225,000      33,950,000      24,250,000

Cash outflows

Fixed Cost                  (5,100,000)      (5,100,000)      (5,100,000)      (5,100,000)      (5,100,000)

Variable costs             (13,120,000)    (20,870,000)    (17,835,000)    (15,990,000)    (1,107,000)

Before tax net cash flows 9,780,000 16,215,000       16,215,000      14,010,000      18,093,000

Depreciation                (4,928,571)     (4,928,571)      (4,928,571)      (4,928,571)      (4,928,571)

Income before taxes    4,851,429        11,196,429      11,196,429      9,081,429        13,164,429

Taxes at 30%              (1,455,429)      (3,358,929)      (3,358,929)     (2,724,429)      (3,949,329)

After tax Income         3,396,000        7,837,500        7,837,500        6,357,000        9,215,100

Add: depreciation       4,928,571        4,928,571        4,928,571        4,928,571        4,928,571

After tax cash flows    8,324,571        12,766,071      12,766,071      13,196,571      14,143,671

After tax salvage         0                      0                                  0                      0          5,500,000

After cash total NCF   8,324,571        12,766,071      12,766,071      13,196,571      19,643,671

Discounting rate @ 12 % 1.12            1.2544             1.404928         1.57351936     1.762341

PV of cash flows         7,432,653        9,086,637        9,086,637        8,386,659        11,146,351

Total value of cash flows = $45,138,937

NPV = Present Value – Initial Outlay

NPV = 48,960,937– 34,500,000

= $14,460,937

This company should proceed with the investment of the smartphone as this is a viable program. The Company should consider changing the units produced to shield the firm from underlying risks.

  1. Should Emu Electronics produce the new smartphone?

The company should produce the new smartphone as it has a positive return and a high IRR. The NPV is $16,713,369 and the IRR is at 40%.

  1. Suppose Emu Electronics loses sales on other models, how will this affect the analysis?

First, there is need to calculate the IRR of the two business so as to know what will be the decision. If the difference between the benefit of adapting the new product and the losses from other activities is positive, then the company should adopt the method.

 

Part B

COST OF CAPITAL FOR HUBBARD COMPUTER LTD

The objective of the study is to check on the cost of capital for Hubbard Computer Ltd. The company is not registered in the stock exchange and therefore they have choose to analyze the market using Harvey Norman financial statements.  The paper explores the Dividend Discount Model and Cash Flow to Equity to conduct the research. Assumptions are made in the valuation of the cost of capital for 2016.

Market capitalization for Harvey Norman is $5,819. The number of shares for the company is $8,099,094. It has a volume of 1,752,168. The shares are trading at $5.23. Its highest trading has been a low of $5.13 and a high of $5.24. Its 52 week high and low is $5.58 and $3.65 respectively. Its dividend is at 0.7 representing a yield of 5.74.

Even though betas for individual company are available from estimation service such as Fin Analysis, all these services begin with regression beta and has very high standard error and also tends to reflect businesses’ past financial structure rather than the present. For these reasons, betas determined by business fundamentals are preferred. A 0.74 represent Beta for Harvey Norman.

Dividend Discount Model

The dividend discount model is an approach that examines stocks that pays good dividends. It’s also referred to as the Dividend Growth Model. Its most straightforward way of using it is the Gordon Growth Model. This method has the same idea as the NPV only that the shares are a representative the item we are valuing and all the impending dividends is a representative of all future cash flows of the share. In this method, the value of share is equal to the value of all future dividends. This method can be used by in analyzing the dividend of HVN.

For example, the share price is $2 annually. The country has been raising the price of the dividend for the last 20 years. The history of the company might have raised the dividend at an average of 8 percent annually in the last decade. The estimation made by a finance officer is that the average growth will be 5 percent going forward. If an investor wants an 11 percent as his rate of return in his investment, then the % can be used as a discount rate. Next year dividend is $2.10 as it will have grown to 5 percent. If discounted, the amount is worth $1.89 today. This means that in case there is $1.89 today, it can be turned into $2.10 in one year by compounding it by 11 percent. 2. Cost of Equity:
This paper uses Capital Asset Pricing Model (CAPM) to calculate the required rate of return. The formula is:
Cost of Equity = Risk-Free Rate of Return + Beta of Asset * (Expected Return of the Market – Risk-Free Rate of Return)
a) The study  uses US 10-Year Treasury Constant Maturity Rate as the risk-free rate. It is updated daily. The current risk-free rate is %.
b) Beta is the sensitivity of the expected excess asset returns to the expected excess market returns. Harvey Norman Holdings Ltd’s beta is 0.74.
c) (Expected Return of the Market – Risk-Free Rate of Return) is also called market premium. The study requires market premium to be 7.5%.
Cost of Equity = % + N/A * 7.5% = N/A

Cost of Debt

As not all liabilities on a firm’s balance sheet are interest bearing, applying after tax cost of debt to these items can provide a misleading view of the true cost of capital for a firm. Consequently, only interest bearing debts are considered.

The paper uses last fiscal year end interest expense divided by the latest two-year average debt to get the simplified cost of debt. As of Jun. 2016, Harvey Norman Holdings Ltd’s interest expense (positive number) was $32.082161362 Mil. Its total Book Value of Debt (D) is $269.459104938 M.
Therefore, the Cost of Debt = 32.082161362 / 269.459104938 = 11.9061%.

The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. The WACC is commonly referred to as the firm’s cost of capital. Generally speaking, a company’s assets are financed by debt and equity. WACC is the average of the costs of these sources of financing, each of which is weighted by its respective use in the given situation. By taking a weighted average, we can see how much interest the company has to pay for every dollar it finances.

The WACC formula is:

WACC = E / (E + D) * Cost of Equity + D / (E + D) * Cost of Debt * (1 – Tax Rate)
 

 

 

WACC = E / (E + D) * Cost of Equity + D / (E + D) * Cost of Debt * (1 – Tax Rate)
= 0.9423 * N/A + 0.0577 * 11.9061% * (1 – 28.82%)
= N/A

The market value of equity (E) is also called Market Cap. As of today, Harvey Norman Holdings Ltd’s market capitalization (E) is $4396.817 Mil. The market value of debt is typically difficult to calculate, therefore, this paper uses book value of debt (D) to do the calculation. It is simplified by adding the latest two-year average short term debt and long-term debt together. As of Jun. 2016, Harvey Norman Holdings Ltd’s latest two-year average short term debt was $157.576388889 Mil and its latest two-year average long term debt was $111.882716049 Mil. The total Book Value of Debt (D) is $269.459104938 Mil.
a) Weight of equity = E / (E + D) = 4396.817 / (4396.817 + 269.459104938) = 0.9423
b) Weight of debt = D / (E + D) = 269.459104938 / (4396.817 + 269.459104938) = 0.0577

Conclusion

It costs a lot of money to raise capital. As a result, the firm that generates higher rate of investments than it costs the company to raise the capital needed for that investment is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases, whereas a firm that earns returns that do not match up to its cost of capital will destroy value as it grows.

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Coca Cola Financial Statement Analysis

Financial Statement Analysis

Financial ratios are tools to help with the interpretation of results. They are used to indicate the financial performance of a company in comparison to its previous years. Parties in an organization can also use ratio analysis as a basis for making decisions. For instance, managers can use them to identify key strengths and weaknesses upon which strategies can be formed. Funders can use them to make comparison between companies and make a judgment on the effectiveness of the management. The various ratios used in analysis include profitability ratios, activity ratios, liquidity ratios, the long-term solvency ratios and the short-term solvency ratio.

Liquidity ratios

They are used to determine if a company will be able to meet its current obligation when it becomes due (Rutkowska-Ziarko, 2015). Current ratio measures the firm’s ability to pay off the short-term liabilities using current assets. Current ratio is an important liquidity ratio since it indicates whether the firm can be able to pay off liabilities that fall due within a year. Current assets represent those assets that the firm can easily convert into cash. They include cash and cash equivalents, marketable securities, and other items. Current ratio is obtained by dividing current assets by the current liabilities.

An ideal current ratio is ‘2’. However, a ratio of 1.5 is also acceptable if the firm has adequate arrangements with its bankers to meet its short-term requirements of funds. It indicates the extent to which the current assets exceed the current liability. A high current ratio shows that funds are not being adequately employed whereas a low current ratio indicates danger to the management. The current ratio of coca cola company has increased meaning the funds are being well utilized. The company should continue utilizing the funds to ensure the ratio increases to a range of between 1.5 and 2.

Related: Coca-Cola Company Organizational Behavior

Profitability ratios

They are used to depict the efficiency in which operations are conducted in a company (Rutkowska-Ziarko, 2015). Gross profit margin, net profit margin and the return on equity are used. The gross profit margin is the ratio of the gross profit to the net sales. It indicates the limit in which a company should manage its operating expenses. The GPM of Coca Cola Company has maintained a percentage of 60-61% in the last three years meaning the sales have remained within the same range. The net operating margin has also remained within the same range whereas the return on equity has improved from last year. This shows there is effective utilization of assets in the company.

Leverage ratios

The ratios indicate the financial position of a company. A company is said to be financially sound if it’s able to meet its short term and long term financial obligation without difficulty. The ratio shows the soundness of the financial policies used by accompany. The debt to equity ratio and debt ratio are used to determine the financial position of a company. The debt to equity ratio is the ratio of total debt to the shareholders equity. It is said to be ideal when the shareholders fund equal to the long-term debt. However, it is also acceptable if the liabilities do not exceed twice the shareholders’ funds. Coca cola company debt to equity ratio has increased from the year 2015 to the year 2016. This means more funds in form of long-term debts have been acquired over the year. The management should not worry, as the debts do not double the amount of the shareholders equity. The debt ratio is the ratio of the sum of the current liabilities and the long-term debt to the total assets.

References

Rutkowska-Ziarko, A. (2015). The influence of profitability ratios and company size on   profitability and investment risk in the capital market. Folia Oeconomica      Stetinensia, 15(1), 151-161. doi:10.1515/foli-2015-0025

https://www.sec.gov/Archives/edgar/data/21344/000002134417000009/a201612310-k.htm

Related:

Case study of Amazon and Wal-Mart-Financial Statement & Data Analysis

 

BUSN 7131X Research Assignment

BUSN 7131X Research Assignment

Case 1

A Taxpayer explains to you that he sold his fully depreciated, 100% business-use vehicle for $10,500 and then purchase another vehicle for $10,000. The vehicle he purchased is used 100% personally. Does this qualify as a like-kind exchange and thus any gain is deferred?

Solution

No. The taxpayer does not qualify for like-kind exchange. The reason why it doesn’t qualify for like-kind exchange is because the property relinquished and that acquired must be held for business or investment purpose (Brownlee, 2016). He has sold a business-use vehicle and purchased a personal vehicle. Therefore, no gain that can be differed in this case.

Case 2

Jackson graduated from Marquette University in May 2015. Prior to graduation, he was a full-time student from January 3 through May 22. After graduation, he started working as a marketing assistant and was eligible to participate in his employer’s 401(k) plan. During the year, he made 401(k) contributions of $2,000 and had adjusted gross income of $18,750. Since this is the first time has participated in a retirement plan, he does not have any distributions from other plans. Can Jackson claim a credit on Form 8880, Credit for Qualified Retirement Savings Contributions, for his contributions to the 401(k) plan?

Solution

Yes. Jackson can get up to 20% of his contribution as his income is between $18,251 and $19,750. Thus, he qualifies to claim a credit on form 8880, for his contribution to the 401 (k) plan. Also, he had already finished school and graduated from university removing him from the bracket of full time students.

Case 3

Jerry and Elaine have a child who is two years old. The couple incurs $11,800 in child care expenses while they work. Jerry earned $55,000 and Elaine earned $16,750 during the year. Jerry’s employer has a dependent cadre FSA. Under the plan, Jerry had $3,500 set aside tax-free, for reimbursement of child care expenses, which shows in his W-2 box 10. Will Jerry and Elaine receive the dependent care credit on their tax return?

Solution

Yes. Jerry and Elaine should receive the dependent care credit on their tax return. Their income is more than $43,000 and this makes the couple to qualify for the 20% break. Thus, they will get a tax break of only $700 ($3,500×20%).In this case, a tax payer can set aside up to $5,000 in pretax money in his FSA, and claim the dependent-care credit of up-to $1,000 in extra expenses.

Case 4

Pat owns an unimproved lot adjacent to a local church that is currently worth $110,000. Pat inherited the lot from his father. At that time, the FMV was $95,000. The church offers Pat $88,000 for the lot and he accepts. Pat is under the impression that he will have a $7,000 ($88,000 – $95,000) capital loss that he can use to offset capital gains that he generated in current year. Is Pat correct? Show computations to support your answer.

Solution

Yes. The capital loss is $7,000. This can be calculated by lessening total sale price – cost of acquisition ($88,000-$95,000= $7,000). Pat can only deduct $3,000 0f final net short or long-term losses against any other types of income in a given year. The other losses can be carried forward to next year (Scholes, 2015).

Case 5

An accrual basis C corporation gave Hannah a bonus on February 15, 2016, based on services performed during 2015. Hannah is a cash basis shareholder/employee who owns 40% of the C Corporation’s stock, while her father owns the remaining 60%. Can this bonus be deducted on the C Corporation’s 2015 Form 1120, U.S. Corporation Income Tax Return?

Solution

No. C Corporation allows only shareholders who have a 50% or higher shares or ownership in a company at the time the bonus is paid can have their bonus deducted.

 

Reference

Brownlee, W. E. (2016). Federal Taxation in America. Cambridge University Press.

Scholes, M. S. (2015). Taxes and business strategy. Prentice Hall.

Related:

Tax Regulation and Strategies-(BUSN 7131X)

Tax Regulation and Strategies-(BUSN 7131X)

Tax Regulation and Strategies (BUSN 7131X)

Answer all questions. Points above 30 will be credited to extra credit. You must show all calculations. No points will be awarded if calculations are not shown.

  1. Loss deduction. Pylon, Inc. a calendar year S corporation, is partly owned by Doris, who has a beginning stock basis of $10,000. Doris’ share of long-term capital gain (LTCG) is $2,000 and her share her share of an ordinary loss is $9,000. If Doris receives a $6,000 distribution, what is her deductible loss?

 

Solution

 

Long-term Capital Gain                      $2,000

Ordinary loss                                         ($9,000)

Loss                                                          7,000

($6000 -$3000)

Deductible loss is $3,000 while she is left with $3,000. The 4,000 loss is carried forward to the next year.

Doris can only deduct $3,000 0f final net short or long-term losses against any other types of income in a given year. The other losses can be carried forward to next year.

 

  1. Alimony recapture. Dave and Sue’s divorce became final on January 2 of the current year. Dave is an executive for a Fortune 500 company and Sue is starting her own business this year. In the current year (year 1 of the divorce agreement), Dave expects his marginal income tax rate to be 35% and Sue’s marginal income tax rate will be 25% because of some start-up expenses of her business. Two years from now (year 3 of the divorce agreement), Dave will retire and will be in the 15% tax bracket, and Sue’s business, a sole proprietorship, will cause her to be in the 35% tax bracket. Dave intentionally front-loaded his alimony payments to Sue ($60,000 in year 1, $40,000 in year 2, and $20,000 in year 3). What is Dave’s alimony recapture in year 3? Formula: R3 = P1 + P2 -2P3 – $37,500

Solution

R3 = P1 + P2 -2P3 – $37,500

P1 = alimony payments for year 1

P2 = alimony payments for year 2

P3 = alimony payments for year 3

 

 

60,000+40,000-(2×20, 000) -37,500

=100,000 – 77,500

R3=22,500

 

  1. Education expenses. Dawn, who holds a bachelor’s degree in art history, is a middle school teacher in New York. She wants to further her education in art history, believing this will allow her to become a better teacher. Dawn spent her summer break attending the University in Hawaii taking art history courses. Her expenses are as follows:

 

Books and tuition                                       $2,000

Meals                                                               1,000

Lodging                                                              700

Laundry while in travel status                      200

Transportation                                                 700

Total                                                               $4,600

What is Dawn’s education expense deduction?

Solution

Books and Tuition                          $2,000

Meals (50%) x 1,000                     $500

Lodging                                             $700

Transportation                                $700

Education Expense Deduction    $3,900

 

  1. Asset basis after Section 179 expense election. In 2017, Berry Corp. purchased and placed in service a machine to be used in its manufacturing operations. This machine cost $2,040,000. (a) What portion of the cost may Berry elect to treat as an expense rather than as a capital expenditure, assuming net taxable income of $4million? (b) What is the adjusted basis of the machine (ignore any depreciation allowable).

Solution

  1. Deduction limit for 2017 is $510,000. This is the portion of the cost that Berry may elect to treat as an expense rather than as a capital expenditure.
  2. $2,040,000 – $510,000 = $1,530,000

 

  1. Reporting partnership income. Blue Jay Partners is a partnership with fiscal year ending on September 30. Bethany, a 20% partner in the partnership, is a calendar year individual taxpayer. For the taxable year ending September 30, 2017, Blue Jay had operating income of $100,000. Blue Jay also had operating income of $30,000 for the period of October 1, 2017, through December 31, 2017. How much income must Bethany report on her 2017 tax return?

Solution

 

Jan 1, 2017 – Sept 30, 2017 9/12×100, 000                    75,000

Oct 1, 2017 – Dec 31, 2017   3/12×30, 000                      7,500

82,500

Income on tax return  for Bethany is 20% x82500          = 16,500

 

  1. Wash sale rule. Tiffany purchased 100 shares of ACE Corporation stock for $28,000 on January 1 of last year. In the current tax year, she sold 30 shares of these 100 shares for $8,000. Twenty-nine days earlier, she had purchased 30 shares for $7,500.

Solution

  • What is her recognized loss/gain based on these transactions?

Value of the shares on purchase = $28,000/100

1 share is $280

Sold at 30 shares at $8000

Cost of share = $8000/30 = 267

Loss per share = $280-267 = 13

Total loss = 30 x 13 = $390

  • What is Tiffany’s basis in the new shares?

$28,000 + 8,000 + 7,500 = 43,500

New cost basis per share is 43,500/100 = $435

  1. Gross profit percentage: Mike sold a 40-acre tract of land for $500,000 on January 1. The land had an adjusted basis of $300,000. The agreement specified a down payment of $100,000, with the remaining $400,000 sales price to be paid over a five-year-note term at 10% interest.

Solution

  • What is the gross profit percentage from the sale?

 

Gross Profit/Sales x 100 =

$ (500,000 – 300,000)/ $ 300,000x 100

200, 000/ 300, 000 x 100

= 66.7%

 

  • What is the capital gain on the down payment?

300,000 – 100,000

= 200,000

 

  • What is the return of capital on the down payment?

200,000 – 100,000 = 100,000

 

  • If Mike received a note payment of $120,000 in the first year, of which $40,000 represented accrued interest, how much of the $120,000 is ordinary income, capital gain and nontaxable return of capital.

Ordinary Income = 80,000

Capital Gains = 40,000

Nontaxable Return of capital = 8,000

 

  1. Social Security Income: George and Jody Taylor, who are married and file a joint return, are both 65 years old and retired. They anticipate income this year to include $16,000 from a company pension, 6,000 in interest income, and $9,000 from part-time jobs. Their Social Security benefits will be $12,000. How much of their Social Security is included in gross income? (2 points)

Solution

Company pension                          $16,000

Interest income                              $6,000

Part-time jobs                                 $9,000

Gross Income                                  $31,000

The income is less than $32,000 and no adding 50% to the adjusted gross income.

  1. Casualty loss: In 2017, Larry had art worth $10,000 (basis of $15,000), stolen from his apartment. During the year, he had a salary of $30,000 and no other deductions. What is Larry’s itemized deduction from the theft? (2 points).

Solution

Itemized deduction from theft         ($15,000 – $10,000) = $5,000

 

  • Section 1250 Recapture: Mark sold a building on June 15 for $100,000. Mark’s income tax rate is 28%. He had acquired the building more than five years earlier for $75,000. Straight-line depreciation taken was $30,000. Calculate the Section 1250 gain and the long-term capital gain. At what rate is each gain taxed. (9 points)

 

Solution

Purchase price                                                                                      $75,000

Depreciation                                                                                          $25,000

Basis for the property                                                                         $50,000

Overall gain after selling the property @ 100,000-50,000      $50,000

Un-recaptured section 1250 gains                                                  $25,000

Tax higher capital gain 25/100 x 25,000 =                                    $6,250

Tax at long-term capital gain 15/100 x 25,000                            $3,750

 

Capita gain is taxed at 25% while long-term capital gain is taxed at 15%

Related:

Financial Accounting and Reporting

Ratio Analysis

Question

Use the Internet to research an annual report of a retail company.
Then, imagine you are an investor or creditor; suggest the ratios that you believe would provide an investor or creditor with the most important information needed to make accurate predictions about the company’s financial condition. When analyzing a company, is it more important to compare the ratios to competitors or to the company’s previous history?
Provide a rationale for your response.
Note: Students using the online discussion thread must provide a link or instructions to the researched report.

Sample paper

Ratio Analysis

The price/earnings ratio (PE) is one of the most important ratios that can best make predictions about the organization’s financial performance. The PE ratio acts as an absolute way of firm valuation. This is because it values stock as a going concern (Hampton, 2011). The PE ration examines the market price, earnings per share in valuation, and after-tax profits. Earnings per share help in providing an accurate prediction of market activity. The PE ratio is an accurate way of measuring an organization’s performance also because the ratio gives the dollar amount that one needs to invest in the organization in order to earn a dollar in returns of the organization’s earnings.

A creditor or investor may be interested in capital structure ratios, mainly the debt-asset ratio and the debt-equity ratio. Capital structure ratios provide investors with crucial information concerning the organization’s debt and equity components (Hampton, 2011). The ratios help in examining the extent to which the organization’s assets are debt financed. The investor can use the capital structure ratios to know whether an organization has incurred excessive debt that it cannot be able to repay. Likewise, the investor can use the ratios to evaluate the future prospects of the organization and relating to financing. Capital structure ratios are therefore integral to both investors and creditors.

The net profit margin is another ratio that can provide an investor or creditor with key information about an organization. The net profit margin is a ratio that helps evaluate the efficiency of the company in its cost control efforts. A high net profit margin indicates that the organization is efficient in turning revenues into actual profit. Lastly, it is more important to compare ratios to the competitors. The rationale behind this is that it provides an opportunity for the organization to see how it is performing relative to other similar businesses.

Reference

Hampton, J. J. (2011). The AMA Handbook of Financial Risk Management. New York, NY:        AMACOM.

Related:

ACCOUNTING EDUCATION

 

ACCOUNTING EDUCATION

Question

Accounting is the study of how businesses track their income and assets over time. Accountants engage in a wide variety of activities in addition to preparing financial statements and recording business transactions. These activities include computing costs and efficiency gains from new technologies, participating in strategies for mergers and acquisitions, quality management, developing and using information systems to track financial performance, tax strategy, and health care benefits management.

Use the Internet or the Strayer Online database to research career options within the accounting field and accounting job postings in your local area to respond to the questions in the assignment.
Write a one to two (1-2) page paper in which you:
Describe at least two (2) career options someone with an accounting education can pursue. Be sure to reference sources such as the Bureau of Labor Statistics and the American Institute of Certified Public Accountants.

Describe one (1) researched accounting position, and explain the essential skills that would make a candidate successful in the position.

Sample paper

Accounting Education

In the present world, accountants are becoming increasingly important to organizations and companies since they help in upholding the transparency and accountability of these institutions. Accounting is the systematic and comprehensive bookkeeping of financial transactions undertaken and conducted by an organization in a particular financial year. Additionally, accounting focuses on summarizing, analyzing and reporting these financial statements to oversight bodies mostly auditors. This assignment will attempt to shed light on various aspects of accounting education.

Question 1: accounting careers

  1. Senior financial analyst – senior financial analysts are important in almost every industry in the economy in the globe today. The primary duty of these analysts is to review the financial status of the companies they work for and make appropriate recommendations for how the organization can minimize the cost incurred to conduct the daily operations of the company. Moreover, the chief financial analyst has the responsibility of leading other financial analysts who are at the center of the company finances to create transparent financial statements(Khanna, 2015). Often, they work in their own offices or conference room to present the financial statement to the company employees or the management and explain the way forward regarding finances. However, for one to qualify for this position, they need to be diligent, detail-oriented and accurate. A senior financial analyst is likely to receive an average annual salary of $74,000.
  2. Accounting software developer – with the rampant spread of technology in the world today, there is the need for more accountants to learn and employ technology in their fields. As a result, an individual with accounting education skills can support and lead a software company’s team of manager and developers to develop accounting software. Accounting software can be used to bill and time tracking obligations as well as licensing audits. In the case of problems with their accounting software, the accountants and other individuals in the company with accounting education can step out of their accounting role to develop and repair them. An accounting software designer has an average annual salary of $89, 000.

Related: CAFR AND CCR REPORT

Question 2

Bookkeeping is one of the positions that individuals with accounting education can occupy in an organization. Bookkeeping entails the recording all financial transaction conducted by an organization in a particular financial year. Bookkeepers have a duty to perform basic duties as they strive to maintain complete financial records, keep tabs of accounts of the company as well as control the accuracy of processes used for recording the financial transaction. Bookkeepers help to maintain financial records for all types of organizations and companies.

For an individual to qualify for this position, he or she has to have a high school diploma at a minimum. High schools’ lessons on mathematics, the computer spreadsheet, and bookkeeping programs are important for individuals who want to pursue this career line. However, it is worth noting that high school graduates have to undergo additional training on the job on important aspects of bookkeeping such as double entry, calculating interest and monitoring accounts once they are employed by different companies (Sinclair, 2015). A good bookkeeper is likely to show special skills and attributes such as strong analytical and problem-solving skills, good organizing skills, good computer skills, attention to detail and patient and dedication. All business transactions should be recorded whether big or small to ensure that accountability and transparency in the organization is not compromised.

References

Khanna, M. &. (2015). „Gender perception on accounting career”. . International Journal of Applied Research, 1(11),, 376-381.

Sinclair, R. C. (2015). A study of the scarcity of qualified applicants for governmental accounting positions (Doctoral dissertation, University of Phoenix).

Related:

ANALYSIS OF THE FORM 990 FOR NOT-FOR-PROFIT

Statistics and Criminal Justice Leadership

Question

Write a 1,050- to 1,400-word paper discussing how and why statistical data should be used by criminal justice leadership.

A few examples include: Statistical support to criminal justice policy making or criminal justice research in support of proactive policing.

Include at least three peer reviewed references

Answer

Statistics and Criminal Justice Leadership

The groundbreaking report given by the commission appointed by the president on administration of justice and law enforcement indicated by (Skogan, 1975) was the turning point for criminal justice in the United States of America. The commission proposed more than 200 recommendations which if were effectively implemented would give an assurance of minimizing the trends in the crime each year. Among the recommendations forwarded includes the role of statistical data in criminal justice, and how important it would be to eliminate crime in the society. Despite the clear road map being established in the succeeding years accompanied with frequent review of polices to match to the current advancement in criminal acts, achieving a satisfactory goal has proven very elusive. Hence, this paper is going to explore the purpose of the statistical data as well as expound on the reasons why the criminal justice leadership needs to exploit its capability in handling crime.

Crime in the society causes a lot of panic and discomfort; its recurring impact can be profoundly felt i.e. it costs the states a lot regarding revenue loss, loss of lives and property. It is, therefore, imperative that the law enforcement agencies such as the police, put in more effort towards eliminating such vices. Moving away from the traditional system of handling crime the 21st-century police has the capability to involve new systems and methods of addressing crime. The advancement in technology has offered justice systems with substantive plans to collect accurate data, and store them safely for reference on demand. The last decade has seen a rise in the use of statistics to devise better methods of ensuring a decline in crime rate. Various policing departments have implored science and research to look for best alternatives in curbing crime, with results being some models likes CompStat (Nally, Greenspan, & Willis, & Weisburd, 2003) which have played a crucial role in crime control and policing.

Predictive policing

Predictive policing has been an initiative that accredited to the significance of statistical data. It is the employment of statistics models to anticipate increased risk of crime. The result obtained from the statistics provides the authority with the level at which a particular crime has infiltrated in the society and hence devices means to ensure that there are prompt interventions. It is very crucial since the leadership can find a general trend that different crime cases show, the possible accelerating factors or influences that cause identified crime with the intent to eliminate the vice. This type of policing is becoming very, has since been borrowed by states governments and in 2015, the Miami police came up with a predictive tool called hunchlab (Gibbs, 2015) which received a grant of $600,000 from the Bureau of Justice and an aid to implement the system.

Allocation of resources

The data on the main crimes can be obtained by the leadership from various bodies vested with responsibilities track them in the state. For instance, the data provided by the NIBRS system provides accurate crime data that can furnish the leaders with a comprehensive, clear report on various crimes cases i.e. terrorism. Such a report will be critical to devise means to allocate the various security organs in the affected different regions and hence to utilize the power of prevention before an occurrence of criminal activity. When an early prevention of a possible occurrence of crime is executed, the safety of the citizens is assured and besides the States does not face massive losses of revenue, and lives which are equally crucial for the growth of a country. Areas that shows a great trend of crimes will require deployment of a vast number of the security officers, and besides the spotted areas can be treated with infinite intelligence (Weisburd, 2000).

Security preparedness

Security preparedness by a country is pivotal. It can be achieved by procuring of resource needed to protect a nation effectively in an event of a serious crime requires a proper research before accomplishment. Every data that is collected from the various agencies obligated renders the type of offense and then provides a detailed summary report that can give insight into the sectors that needs revamping (Nally, Greenspan, & Willis, & Weisburd, 2003). These requisites may differ depending on the frequency, trend, and magnitude of crime in different parts of the country, i.e. the methods used for handling robbery offense may not be sufficient for a terror attack. NIBRS gives more elaborate, precise, and significant summary reporting system than the other agencies which is essential for the decision making.

Collective responsibility

The crime eradication process is a collective responsibility. It necessitates that all the agencies cooperate with a common objective to eradicate crime from the society. When the different levels of the security organs gather data on crime in the various capacities, the similar crimes that appear across all the report should draw the attention of criminal justice leadership. Some of the problems associated with these offenses can be identified, and a special inquiry is established or research to provide an appropriate plan to handle the vice (Weisburd, 2000). The leadership bears the responsibility to recommend effective actions to be taken after a criminal investigation and by them, the country can adopt a new system of handling criminal issue

Safety of the Nation

Living in a safe environment is the desire of each citizen in a country. The law enforcement agencies bear the responsibility of providing a secure environment depending the level of the jurisdiction of the department. Various states’ security data can be accessed by the leadership of the criminal justice, which are critical in declaring the security status of the nation. The leadership can hence furnish the government with a report that depicts the actual picture of the security state of the nation (Gibbs, 2015). Regions with critical conditions can be highlighted, and a precaution is made open to the public for purposes of preparedness. An invention such as Hunchlab has been effectively utilized in past.

Conclusion

Statistical data is evidently crucial in criminal justice and serves a paramount role in controlling crime especially in a world that technology is advancing at a very fast rate. With access to accurate data, the leadership ensures that the government is alert to defend the nation by providing adequate resources. A critical analysis of the available crime data it is possible to predict the extent to which the nation is regarding security, and it may avert the possible causes. It is critical for crime to be treated as a collective responsibility of all the law enforcement departments, combining efforts to come up with effective measures to eradicate recurring crimes is imperative.

 

References

Gibbs, P. (2015, April 29). The benefits of data in criminal justice: Improving policing. Retrieved from Sunlight Foundation: https://sunlightfoundation.com/blog/2015/04/29/the-benefits-of-data-in-criminal-justice-improving-policing/

Nally, A., Greenspan, R., & Willis, J. J., & Weisburd, D. (2003). Reforming to preserve: Compstat and strategic problem solving in American policing. Criminology & Public Policy, 421-456.

Skogan, W. G. (1975). Measurement problems in official and survey crime rates. Journal of Criminal Justice, 17-31.

Weisburd, D. (2000). Randomized experiments in criminal justice policy: Prospects and problems. Crime & Delinquency, 181-193.

Crime strategy

IFRS-Intangible Assets

IFRS-Intangible Assets

Intangible assets are non-monetary assets without physical substance and can be identified as either separable or arising from contractual rights or other legal rights. These are the long-term assets of an entity who derive value from the worth added onto other assets. The intangible assets can be organized into two key groups; unlimited-life assets (trademarks) and limited-life assets (copyrights, goodwill). Both GAAP and IFRS acknowledge intangible assets to be non-monetary assets (Plus, 2016). The recognition criteria for both accounting standards is that there are probable economic benefits in the future that arise from the asset and that the price or value of the asset can be reliably measured. The criteria relates to all intangible assets whether generated externally or internally. According to IAS 38, the probability of economic benefits in the future should be based on reasonable assumptions of conditions that will be present during the asset’s life.

According to ASC 805 and IFRS 3(R), goodwill is recognized only if in a business combination. Apart from development costs, intangible assets that are internally developed are not recognized as assets under both GAAP and IFRS. Besides, in both models, internal costs that are related to the research and development phase are charged as expenditures in the time they are sustained. When it comes to amortization, both GAAP and IFRS require that an intangible asset is amortized over its useful life if it has a definite one. However, there is an exception under GAAP in ASC 985-20 about amortization of computer programs traded to others. In the two standards, if there is a lack of predictable boundary to the stretch over which an immaterial asset is anticipated to produce money inflows to a business, its valuable life is deemed indefinite hence the asset is not amortized (Plus, 2016)

However, there are a couple of differences in how GAAP and IFRS independently address intangible assets. Under GAAP, development costs are charged as expenses as they are incurred unless addressed otherwise by guidance from a different ASC topic. However, development costs that are connected to computer software developed specifically for external use are capitalized after the foundation of technical feasibility. If the software is designed for internal use, the only costs that can be capitalized are those incurred throughout the application growth stage. In IFRS, development costs are exploited only when the economic and technical feasibility of a venture can be verified. The demonstration can be done following specific criteria such as the venture’s commitment to complete the asset, its technical feasibility and its capacity to trade the asset in the coming days. Though these standards may sound similar with ASC-985-20, in IFRS, there is no distinct guidance on handling development costs related to computer software (Young, 2011)

Intangible assets revaluations is another factor treated differently by GAAP and IFRS. In GAAP, revaluation of intangible assets is not allowed (unless it is for impairments). Intangible assets are measured at historical cost. The IFRS model also allows for intangible assets t be accounted for at historical cost. However, it is different from GAAP as it allows revaluation of assets in limited situations. If an intangible asset’s price is quoted in an active market, an entity is permitted to do an accounting policy election on whether to use the cost or the revaluation model. If an entity chooses an accounting system, it must apply it to the whole class of intangible assets (an individual asset without an active market is exempted). The revaluation model is only used after the asset has been recognized at cost.

When it comes to advertising costs, under GAAP, such costs are expensed as acquired or when marketing is done for the first instant. However, there is an exception if the costs correlate with direct-response advertising and expenses for advertising costs sustained after proceeds linked to those costs are identified. Direct-response advertising is reported as an asset, net of amortization since it results in possible future economic gains. It is amortized over the period in which the profits are expected to be obtained. On the other hand, expenditures sustained after revenues linked to advertising costs that are recognized relate to cooperate advertising. Revenues related to transactions that occur due to cooperate advertising are earned before reimbursements are made to customers. Therefore, an entity should expense cooperative advertising once the client’s revenues are recognized. For the case of the IFRS model, advertising charges are expensed as sustained. However, a prepayment is recognized as an asset when an entity gains a right of access to the related goods or receives related services (Young, 2011)

GAAP and IFRS also differ in the handling of the level of impairment testing for goodwill. Under GAAP, the reporting unit is the point at which goodwill is analyzed for impairment with the lowest level being one level below the operating segment. Under IFRS, the point at which goodwill is analyzed for impairment is the (CGU) cash-generating unit. However, in this model, the lowest testing level is not specified. The only rule is that the testing level should not be larger than the level of the operating segment (Plus, 2016)

In goodwill impairment testing, under the U.S GAAP, an entity may apply the two-step test if it qualitatively verifies that the fair value of the reporting unit is less than the carrying amount or chooses not to enact the qualitative valuation. Under the IFRS model, the recoverable sum of a cash-generating unit is equated with the carrying amount of the cash-generating unit. If the carrying amount is more than the recoverable sum, the impairment loss is assigned to reduce the carrying amount of the unit’s assets. The impairment loss is assigned first to reduce the carrying amount of any goodwill that is allocated to the CGU. It is later assigned to other assets belonging to the unit founded on the carrying amount of individual assets (Young, 2011)

For the case of impairment testing of long-lived intangible assets, the GAAP states that an intangible asset whose useful life is indefinite should not be amortized. The valuable life of the asset should be evaluated every period to see if it still falls under assets with indefinite useful life. If there is a change from infinite to finite, it should be accounted for as a change in an accounting estimate. The GAAP model requires that entities must begin by applying the qualitative impairment assessment in order to determine if an intangible asset that is not suitable for amortization is impaired. If the definite-lived intangible asset if confirmed to be impaired, the entity must calculate the fair value of the asset to carry out an impairment test. In IFRS, an intangible asset is tested for impairment through comparison of the carrying amount with the recoverable sum. If it is discovered that the recoverable amount is less than the carrying amount, an impairment loss for the surplus is recognized (Plus, 2016)

References

Plus, I. (2016, January). Deloitte . Retrieved from IAS plus Web site: http://www.iasplus.com/en/standards/ias/ias38

Young, E. &. (2011). The Basics. US GAAP versus IFRS, 16-18.

SEC 10K Analysis of Ford Motor Company

Corporate Governance

Corporate Governance

Introduction

Corporate governance is a set system of practices or guidelines that direct and control the running of a company. It includes balancing the interest of the various stakeholders in a company such as customers, stockholders, and the board of directors, the management and community (Lin, 2011). Some of the mechanisms used in corporate governance include close monitoring of practices, policies, and decisions made by either corporation, their stakeholders or their agents.

Principles of Corporate Governance

Corporate governance is guided by six principles. Firstly, for there to be effective corporate governance, the framework should be one that promotes fair and transparent markets. Participants in the market should be able to rely on that framework when they establish private legal relations. The framework should also support the efficient allocation of resources and ensure it abides by the rule of law. For instance, if a need arises for new regulations, they should be formulated in a way that makes implementing them efficient for all parties involved (OECD, 2015).

Secondly, the framework designed for corporate governance should protect the shareholder’s rights and ensure they exercise those rights. All shareholders should be treated equally even the foreign and minority shareholders. Shareholder’s participation in matters of corporate governance such as the election of board members should be well facilitated. Also, they are entitled to get relevant, accurate information related to the corporation on a regular and timely basis as well as share in the profits made by the corporation.

The third principle that governs corporate governance is related to stock markets, institutional investors and other intermediaries. The framework for corporate governance should create comprehensive incentives in the entire investment chain and enable stock markets to perform well hence contributing to effective corporate governance. However, for the framework to be effective, institutional investors should be ready and willing to exercise their ownership functions in the companies in which they are investors. The framework for corporate governance should stress on agents that give guidance related to investor’s decisions to reduce and reveal any conflicts of interest that may invalidate the honesty of their advice (OECD, 2015).

The next principle guiding corporate governance is recognition of the function of stakeholders in corporate governance. There should be recognition of the privileges of stakeholders founded by legal means or through agreements. The framework set out should also encourage active involvement of stakeholders in corporate matters with an aim to create jobs and wealth. The fifth principles show that an effective corporate governance structure should guarantee that all materials related to the corporation such as information on finances, ownership and performance are disclosed in a timely and accurate matters to all parties concerned (OECD, 2015).

The last principle is concerned with the duties charged to the board. The structure of corporate governance should be one that ensures monitoring of the management by the board, tactical guidance of the organization and the accountability of the board to the other shareholders. Board committees and management of any corporations plays a major role in corporate governance (Adams, 2008). They are expected to review and implement corporate strategies, risk policies and annual budgets for the company. Board members are charged with the responsibility of overseeing key acquisitions as well as the disclosure process. It is also within their duty to make sure that the integrity of the corporations accounting and financial reporting system is not compromised.

Role of an Accountant

The board, board committees, and management of any company play a significant role in corporate governance. These groups are charged with the responsibility to ensure all things relating to the smooth running of the company (Finegold, 2007). Through the function of accounting, companies can follow up on their expenditures and income and establish an overview of their financial status. As an accountant, I have the responsibility to provide support to these groups in the following areas:

Planning

Accounting is used on a practical level as a tool for corporate governing. Corporations can make effective decisions about investments, operations, and developments through accurate and honest accounting. For instance, accounting may show that foreign investment was half as profitable and twice as costly as previously estimated. Using the information, corporate decision makers such as managers, the board, and board committee can be able to make new plans and take corrective measures to avoid losses. Hence, accountants relate to these groups of decision makers by ensuring that they take up plans that yield good results and get rid of ventures that hinder the success of the corporation.

Public accountability

Corporations are held accountable to the public in many different ways. Therefore, through teaming up with the management and boards of companies, accountants can help companies fulfill their obligations such as payment of taxes. The public makes investments decision based on accounting statements. Therefore, accounting is important to corporate governance as it ensures that the value of the company’s investments is represented honestly and accurately. Through accounting, customers can vocalize demands hence pushing the management to consider their need during decision making. Accounting records also help in revealing corporate policies which impact on the public’s view of the corporation.

Shareholder Accountability

Corporations are also liable to shareholders who are co-owners of the company. A shareholder is not only in the form of an individual owning at least one share of the company. But also in the form of a company or institution holding at least one share in the company.  It is a legal requirement for businesses to provide shareholders with accurate and exhaustive financial information. The information provided is utilized by the corporation`s shareholders to make informed financial decisions (Brennan, 2008). For instance, whenever shareholders feel that their money is not being put to proper use, they have the right to withdraw their money or propose a new policy that they believe will be effective. Such accountability is beneficial as the shareholders of any company are entailed to profit when the company does well in its operations. It also comes with a full potential to lose when the company does poorly.

Cash Flow Management

Apart from the role of accounting in long-term planning within a corporation, it also helps in making of short-term plans. Through accounting, managers can plan on money utilization, decide what projects to prioritize and take necessary financial action if necessary. Hence, accounting enables managers to see what is available for spending and where it should be spent. Decisions regarding supplies, labor, and equipment, are also made guided by accounting figures. Corporations, through the accountants, can make records of their short-term financial resources and manage their credit lines hence avoiding unwarranted debts.

Advisory role

Accountants are often used as advisors to corporate decision makers such as the management and board committees. Since they have financial knowledge, accountants can participate in corporate governance by advising the management on what ventures to go into and which ones to avoid. For instance, before a company decides to begin production of a new good or service or expand its operations to other areas, it is important for the management to consult the accountant for financial advice. It will help in ensuring that the company does not end up engaging in a business that will only make losses.

Information to be provided by an accountant

Annual Reports

The accountant of any organization is bound by the corporation act to provide yearly reports to the stakeholders. In the yearly statement, he is to provide a director’s report, which includes the remuneration report and an assessment of the company activities. There is provision for corporate governance statement together with a financial report. The financial report includes the financial statements formulated according to the accepted standards. The shareholders will also require audit reports on the financial report (Ormiston, 2013). The primary objectives of the reports presented by the accountant are reporting on the leading of the company by the executives and the management over the prior year. They teach and enlighten the shareholders- both potential and current. The reports to shareholders also gives an account of the performance under evaluation and also puts the performance in context. The objectives of the company are also explained in the reports, as well as an outline of the future directions and strategies. Fulfillment of both legal and regulatory responsibilities is highlighted in the report. These annual reports can be broken down into specific statements which serve different purposes in the role of corporate governance. They include:

Statements of financial position

These statements are commonly referred to as balance sheets which provide information on the company’s assets, liabilities as well as owner’s equity as at a particular period. Information presented in the balance sheet is used by management to determine the financial standing of the company. The same information is used by potential investors to analyze the feasibility of the company for investment. An accountant uses this information to guide the board through summarizing what the company owns and the debts it owes. Following that information, management can be able to make decisions on how to settle the company’s debts and increase its assets.

Income Statement

It is also referred to as the profit and loss statement or expense and revenue statement. The statement contains reports on the income, profits and expenditures of the company over a specified period (Ormiston, 2013). It is possible to understand the company’s operations through the income statement since it shows the sales and expenses incurred during a particular period. Accountants provide this information to help managers and even investors know if the company made profits or losses in the reported period. In addition, the information contained in the income statement can help the management and board committee of companies to evaluate the possible future performance of the company and assess the possibilities for generating cash flows in the future. Therefore, decisions can be made and changes implemented to ensure the corporation’s objectives are met.

Equity Statement

It is also known as the statement of changes in equity. This statement contains information on shifts in the company’s equity in the reported period. It helps in breaking down of the changes in the interest of the owners in the corporation. This information is of particular importance in planning as it shows the total capital that belongs to the owners of the company. Through such information, decisions pertaining profit distribution can be made (what goes to shareholders and what goes to retained earnings). Also, the management can determine if it has additional shares for issuance to shareholders. If not, it has to get the owner’s approval to adjust the set share capital so that it can issue additional shares.

Cash Flow Statement

The cash flow statement is another type of information provided by accountants that contain the cash flow activities of the company; specifically, it’s financing, operating and investing activities. The primary information presented in the cash flow statement is the amount of money a company makes (Ormiston, 2013).  Corporate decision makers such as the management and boards of companies require this information for efficient planning of corporate affairs. Through cash flow statements, companies get to observe the extent of inflow and outflow of cash. The management uses that information to monitor debts and avoids any unwarranted expenditures. In addition, that knowledge allows management to make informed decisions such as ensuring some degree of income from the company without having to rely on investments from outsiders.

Conclusion

Following the above insight, it is undeniable that accounting is an integral element in the practice of corporate governance. Corporate governance relates to the system or procedure that businesses use to guide their decisions. It acts as a basis for which corporations operate with an aim to achieve their set objectives. Since the primary function of accounting is to keep track of the financial performance of an organization, those tasks play a vital part in determining how an organization implements its corporate governance policies.

Efficient corporate governance demands that corporate-related decisions to do with issues such as foreign investments, market alliances, and market entry are made based on critical evaluation of risks and asset value. The management and other stakeholders normally have varying concerns about the performance of the company. In order to satisfy those concerns, they require information which is provided by accountants. Most of that information is presented in the form of financial statements which are evaluated by the company auditors to ensure their accuracy.

It is evident that most business operations in an organization are governed by accounting information. Such information enables corporations, through the management, to keep track of their finances hence establishing their financial status. It is, therefore, right to say that it is through the accounting function that companies are able to run on both a legal and practical level hence creating a foundation for development and success which is the main objective of corporate governance.

Accountants, therefore, need to identify the role they play in corporate governance and embrace it. They can do that by providing timely and accurate financial information to the decision makers. They should also give financial advice to the management in order to prevent bad business decisions that could lead the company to failure. I believe that if accountants work hand in hand with the management, boards and board committees of their respective companies, they can help contribute to the success of the organization.

References

Adams, R. H. (2008). The role of boards of directors in corporate governance: A conceptual framework and survey. National Bureau of Economic Research.

Brennan, N. M. (2008). Corporate governance, accountability and mechanisms of accountability: an overview. Accounting, Auditing & Accountability Journal, 885-906.

Finegold, D. B. (2007). Corporate boards and company performance: Review of research in light of recent reforms. Corporate Governance: an international review, 865-878.

Lin, T. C. (2011). Corporate Governance of Iconic Executives. The. Notre Dame L. Rev, 351.

OECD. (2015). G20 / OECD Principles of Corporate Governance. Paris: OECD Publishing.

Ormiston, A. &. (2013). Understanding financial statements. Pearson Education.

SEC 10K Analysis of Ford Motor Company

SEC 10K Analysis of Ford Motor Company

SEC 10K Analysis of Ford Motor Company

Introduction

A SEC (Securities &Exchange Commission) analysis of companies is done to provide information that is useful to investors. It contains details about a firm’s industry, the company itself and its impact on the industry. Companies may perform SEC analysis through a 10-K form which is filled annually and contains annual financial statements of a company. According to the 2015 annual report for Ford Company, it is clear that it is on a road to success in the automotive industry.

Facts on Ford Motor Company

Ford Motor Company is an international auto company established in 1919 in Delaware. The company has 67 plants all over the world with close to 199,000 employees. Ford primarily deals in designing, marketing, manufacturing and servicing of Ford trucks ranging from trucks, cars, SUVs and many others. The company also offers services such as leasing of vehicles, maintenance, and automotive finance. Henry Ford was the founder of the company back when it had its headquarters in Michigan. In the beginning of the 21st century, Ford Motor Company was so close to bankruptcy, but it made efforts that have since seen the company make itself huge profits. For instance, in 2015 alone, the company made sales of over 6,635,000 vehicles all over the world at wholesale. It has its operations in Northern and Southern America, Middle East Europe, Africa and Asian Pacific.

Just as its aims on improving quality and establishing customer satisfaction, the year 2014 saw the Ford Company introduce 23 new vehicles globally. It served the largest market share in the United States in 2013, with the F-Series being the popular, high-selling car in the United States in a row for 32 years. Its nameplate Ford Focus was the most-selling nameplate in globally. Positioned in a global marketplace Ford Company has the newest car portfolio and a pledge to deliver constant improvement in fuel costs as it goes green (Motor, 2015)

Issues Affecting the Automotive Industry

The 2015 annual report for Ford Company showed that the automotive sector as a whole is affected by many factors such as adverse economic conditions which are out of their control. Since vehicles are durable goods, customers determine when and whether they need to replace them. A customer’s decision on whether to purchase a vehicle or not is profoundly affected by the slow economic growth, cost of purchasing and maintaining a car, geopolitical events and may other factors. Nevertheless, the automotive sector is very competitive with a growing variety of products being offered by different manufacturers. The industry is also made up of a competitive pricing environment caused by excess capacity in the industry with largely concentrated areas being Europe and Asia. The weakening of the yen value over the last four years has likewise resulted in competitive pressures. Therefore, in order to maintain market shares and high levels of production, manufacturers have given discounts and other forms of incentives to customers (Company, 2015)

Financial Information

For the case of Ford Motor Company, they delivered good results in the year 2015. Their total net income for 2015 was $7.4 billion which was an increase of $6.1 billion from 2014. On the other hand, the total revenue for 2015 was $149.5 billion. Ford Company generates its revenue through the sale of whole cars, their parts, and other additional accessories. Revenue is recorded only after the rewards and risks of possession are shifted to the brokers and suppliers. For the case of vehicles sold at auction, the proceeds made are recognized as revenue the time the sale is made.

The Financial Services sector which is Ford credit generates its revenue from interest on financial receivables. Once Ford Credit originates the wholesale receivable that is connected to buying of a vehicle by a broker, it reimburses cash to a deserving authorized entity in the automotive sector of Ford Company. After the dealer trades the car to a retail client, he pays the wholesale finance receivable to Ford Credit. Revenue in this area is also generated from net deferred origination costs that are inclusive in the decrease in financing income, and that income is acknowledged over the receivable term via the interest method (Company, 2015)

When it comes to the total equity, Ford Company had total equity of $28.7 billion in 2015. This was an increase of $4.2 billion from the previous year which was very impressive. The increase in equity reflected the positive deviations in retained earnings of $5 billion which were related to the whole year of 2015 net income belonging to Ford, which was $7.4 billion. The increase in total equity also reflected the fortunate changes in Capital in excess per value of stock linked to compensational equity issuance of $332 million.

The pre-tax profit results for the automotive sector improved by $3.3 billion as compared to 2014. This progress was encouraged by $7.4 billion of advantageous market features that reflected the victory of the launch of Ford’s new products, their Asia Pacific development approach and the industry growth in Europe and North America. In North America, Ford Motor Company brought top-line development with its operating margin at 10.2% and a pre-tax profit of $ 9.3 billion. The high pre-tax profit was driven by higher net pricing compared to the previous year as well as suitable volume and mix. However, there were partial offsets such as high costs (a one-time ratification bonus) and unfavorable exchange (Company, 2015)

Competitive Environment

The world of automotive industry is growing, with no dominant producer accounts on sales by car manufacturers is highly based on their place of origin. Each car manufacturer earns a high sale percentage within the country source. Major players on a global scale include General Motors Company, Fiat Chrysler Automobiles, Honda Motor Company, and Hyundai-Kia Automotive Group. Besides, there is also Suzuki Motor Company and Toyota Motor Company just to name a few. Ford is on a competitive environment, receiving about 6% market share of the total revenue of around $2.3 trillion within the Automotive Industry. It also projects growth in its carriage services which includes mass transit, taxis, and rides sharing. The services total up to $ 5.4 trillion in revenue on an annual basis.

To bridge the gap in the competitive environment, Ford Company is investing, innovating and leading in being an automotive company. The move saw Ford Company launch 16 new brand cars worldwide in 2015. Through the adamant investment in today’s business, the company can restructure sections that are non-profit making and irrelevant to the future of the company. It has also enabled them to pursue emerging opportunities within the industry. Through the Ford Smart Mobility, the company plans to be a leader in connectivity, mobility, autonomous vehicle, the customer experience and data and analysis. Among the highlights is the SYNC Connect, which allows customers to lock, unlock, start and locate their cars via their smartphones (Company, 2015).

Corporate Social Responsibility

Ford Motor Company recognizes investing in surrounding communities as smart business. They work to build partnerships with communities in order to help address difficult challenges that people face in their lives. Ford’s corporate social responsibility is aligned with the company’s goals and their One Ford plan. The company’s goal is to connect with their neighboring communities more closely by engaging in projects that advocate for things such as human rights, driving safety and access to clean water. They also help communities get their basic needs, support development programs, improve education opportunities and assist in disaster response. All these help in the achievement of the key objective of One Ford, which is to build a better world (Ford, 2014)

As Ford’s business expands globally, the company also expands community investments and volunteering work. The company invests in communities through corporate charities, their community investment arm known as the Ford Fund and through the Ford Volunteer Corps. The company’s efforts to strengthen communities is depicted on their strategies to alleviate hunger and poverty. It also focuses on improving infrastructure, supporting the elderly and disabled in society as well as other marginalized populations.

 

Taxation

Ford Motor income tax expense for the year 2015 was an increase from the previous year. The component of income tax expense that represents income taxes paid as per the enacted taxation laws (current) increased from $365 million in 2014 to $664 million. On the other hand, the other element of income tax expenses known as deferred also rose from $791 million in 2014 to $2,217 million in 2015. The provision for income taxes by December 2015 was at$2,881 which was also an increase from the previous year.

The effective tax rate, which is a ratio calculated by division of the reported income tax expense for continuing operations by GAAP-basis pre-tax income from continuing operations, reported a slight decrease. In 2014, the effective tax rate was at 37.70% but dropped to 28.10% in 2015.For the case of gross deferred tax assets, Ford reported a significant decrease of $21,724 million from $21,790 in 2014. There was also a decrease in net deferred tax assets from $20,186 million in 2014 to $19,893 million in 2015.

Audit Issues

Ford Motor Company just like any other company is subjected to audits for their financial statements which was done by PricewaterhouseCoopers. Upon completion of the audit, it was confirmed that Ford’s financial position as at December 2015 was correctly and fairly presented. It was also confirmed that the results of their operations and the cash flows for the ended year were in accordance with the GAAP in the United States. However, there was an issue regarding an alteration of the accounting principle for recognition of retirement income and other employee benefits. According to PricewaterhouseCoopers, the selection of one accounting method over another fro employee benefits had not been addressed in any accounting literature. However, after reading the reasons for the change in accounting principle provided by the management, the change was accepted. The auditing company also made it clear that they were not responsible for reviewing and auditing of income statements, equity and cash flows for the year ended December 31st, 2013 and was therefore not in a position to provide any assurance on those statements (Company, 2015)

References

Company, F. M. (2015). Form 10K. United States Securities and Exchange Commission.

Ford. (2014, December 30). Ford’s community Projects around the World. Retrieved from Ford Motor Company Website: http://corporate.ford.com/microsites/sustainability-report-2014-15/communities-projects.html

Motor, C. F. (2015, December 31). Ford. Retrieved from Ford Motor Company Web site: http://corporate.ford.com/company.html

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