Investment, Taxes, and Financial Questions - Essay Example

Investment, taxes, and financial questions Question 3 The step an investor before investing in a given corporation is not an overnight affair. An investor takes much a significant period studying the performance of the corporation. No one can dare just dash out his cash with current economic constraints to a firm that from looks it will shut down few days to come. Investor will study the financial statements to be certain the earnings of the firm are stable and consistent. They cannot risk their hard earned cash and, in fact, most investors expect a return from one investment to finance another investment. A stable and consistent earning is easy to predict, and that is what investors need (Brandes, 2004). Managers of Corporation have decided to play a mind game to the investors in manipulating the earnings of the income to lure investors. According to (Palepu, & Healy, 2000), income smoothing refers to the minimization of fluctuations in the earnings of a corporation. He further expounds by claiming that it can be of good course and at the same time be a fraudulent act. A firm can decide to defer revenue for a successful fiscal year to the following that is anticipated to be challenging. This will stabilize the income and prove consistency. Other firms can postpone expenses in a difficult financial year and recognize it in the next financial that is prosperous. Question 4 Working capital measures the liquidity of a firm by deducting the current liabilities from current assets. Liquidity is the ability of a firm to pay its short term due without interfering with its normal operations (Palyi, 1984). Including inventory, prepaid expenses and deferrals in the current assets to determine working capital will not give a realistic state of the firm. Inventories are not easily convertible to cash to run operations of the firm during that financial year. Even if they are auctioned, they will consume much time before cash is earned. Prepaid expenses cannot be reversed easily under normal condition, and, therefore, the cash paid will not be available at the moment to run other business operations. According to (Chattopadhyay, 1982), deferral specifically revenue represents transactions that occurred, but payment will be in the next financial year. He emphasizes that it does not mean the other party will honor and pay the dues. So for these items to be included in determining the liquidity of a firm will result in a false interpretation. Question 5 The principle of relevance and faithfulness representation of the state of the company under U.S. GAAP is beneficial to stockholders. Stockholders need to know whatever measure the company takes what impact will have on them. As well as a being faithful in representing the financial state of the firm to the stockholders for them to make a decision either to sell or buy more shares. Revaluation of asset, as suggested by GAAP, is realistic in the sense that that a plant, equipment will depreciate. The asset value will become negative which is non-logic; therefore, a fair value should be attached and be represented on the financial statement (Hellman, n.d). International Financial Reporting System holds that after initial impairment the value of the asset should be like the one current reported in the financial statements. This will result in a false representation, and the stockholders might make unsound decisions. Question 6 Business community in the United States of America works tirelessly to earn income for the business. The tireless effort by the business community is the why America is a successful nation. The role played by the business community in USA has transformed the lives of not only American but also the global, in general. According to (Burman, & Slemrod, 2013) it is ironical is how the taxing system in USA has made the business community to face challenges when filling taxes. The tax codes have complicated the process of filling, in addition to that, identity of taxpayers have been compromised. Instance of tax gaps is the weakness of the current tax system. Tax gap is the difference between what the taxpayer pays and what he/she is supposed to pay. Internal Revenue Service admits these facts. It will be wise if the tax law is amended to allow for uniform tax base and a simple tax rate. A uniform tax base and a simple tax rate will make it easy for firms to file taxes on their own, thus enhancing privacy (Northwest Florida Daily News, 2011). Taxes collected with the above suggestions can be easily calculated and be predetermined by both parties. Tax payment should always be an enjoyable task to stimulate firms in creating more wealth. Question 7 Ponzi scheme is a plot of luring investors to invest in a given project in anticipation of high returns within a short time. The scheme uses the “desperation” of investors to be actualized. The term Ponzi has its origin from the first schemer Charles Ponzi (“Need and greed: The story of the largest Ponzi scheme in American history”, 2000). It was unfortunate for a 70 years financial and investment analyst, Madoff to engage in a fraudulent scheme. The scheme attracts risk-taking investors who are the first to invest. New investors continue to invest at this point the central operator knows his/her scheme is in course. The old investors are paid by the cash from the new investors. The remaining cash is then pocketed with the central operator who vanishes. In some cases, the central operator continues to run the operation requesting the investors to continue investing for more return. Once his/her target is reached, one flees. Madoff was able to operate the scheme for so decades despite security of exchange commission having report of the scheme. He was the chairman of National Association of Securities Dealers, and this made it difficult for authorities to have doubt in him. Split-strike strategy is a plan used by investors to minimize the losses that might arise in stock investments (Coghill, & Pattak, 2003). The strategy has three main steps. First step is for the investors to purchase stock from different companies to form a portfolio. The prices of the stock should be moving closely to the overall index. In the second step, the investor will sell the call option (holder has right to sell the stock at a specified price and timeframe), higher than the present index. This will restrict income, but cash will be generated. The final step is the purchase put option (holder has right to purchase the stock at a specified price and timeframe) at the prevailing index using call option money. The outcomes of this strategy are also three. The investors can avert a loss and remain at his initial state, earn some income or incur a loss from the sale and purchase of the options. The strategy is viable, but calculative measures should be taken before one decides when to sell and purchase either call or put options. Question 8 It is true that people get into business to earn income. If that was not the case, then business should be non-profit making organization. When it comes to quality in services or good created this touches the growth of a company. Some companies compromise the quality will of goods and services just like General Motors to remain within the budget and make an exceptional income. It is not a nice thought to alter the quality of service or goods you give to your consumers, the consequences for this are beyond any monetary losses. According to (Koehn, 1994), losing clients’ loyalty is a big blow for any business organization. He suggests that it is better for an organization to increase the price of the product and service and maintain the quality or even increase it. Business ethics emphasizes on quality production, using “short-cuts” to meet selfish gains is far from being human. One can just imagine if the quality of foodstuff is compromised to meet financial goals. Quality first then other aspects will follow and fit in (Grace & Cohen, 1995). References Brandes, C. (2004). Value investing today (3rd ed.). New York: McGraw-Hill. Burman, L., & Slemrod, J. (2013). Taxes in America: What everyone needs to know. Oxford: Oxford University Press. Chattopadhyay, P. (1982). Solvency and liquidity ratios. Bombay: Commerce. Coghill, C., & Pattak, E. (2003). Whats your investing IQ? Franklin Lakes, NJ: Career Press. EDITORIAL: Bureaucrats, business and Florida taxes.(Editorial). (2011, April 8). Northwest Florida Daily News. Retrieved March 15, 2015, from http://www.highbeam.com/doc/1G1-161730885.html? Erchinger, H., & Melcher, W. (n.d.). Convergence Between US GAAP And IFRS: Acceptance Of IFRS By The US Securities And Exchange Commission (SEC). Accounting in Europe, 123-139. Grace, D., & Cohen, S. (1995). Business ethics. Australia: Oxford University Press. Hellman, N. (n.d.). Accounting Conservatism under IFRS. Accounting in Europe, 71-100. Koehn, D. (1994). The ground of professional ethics. London: Routledge. Need and greed: The story of the largest Ponzi scheme in American history. (2000). Choice Reviews Online, 37-5215. Palepu, K., & Healy, P. (2000). Business analysis & valuation: Using financial statements : Text & cases (2nd ed.). Cincinnati, Ohio: South-Western College Pub. Palyi, M. (1984). Liquidity. Greenwich, Conn.: Committee for Monetary Research and Education. Read More