Category: Accounting

Financial Statement Analysis: Business Analysis Report

Financial Statement Analysis
Financial Statement Analysis

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Financial Statement Analysis

Business Analysis Report:

Abstract

This report provides an exhaustive comparative appraisal of the fiscal position, cash flows, performance, and evaluation of Bellway PLC and Redrow PLC. These are two companies that both operate in United Kingdom’s real estate industry. The report sought to answer the following questions: Is Bellway in a better financial position than Redrow? Which company is more profitable for investors between Bellway and Redrow? Which of these two companies is better positioned to exploit the opportunities in its environment? The results indicate that Bellway is better positioned fiscally than Redrow in case an emergency situation comes up. All the same, Redrow is better positioned to exploit the opportunities in its environment than Bellway.

Business analysis report

Introduction

This report provides an in-depth comparative appraisal of the fiscal position, cash flows, performance, and evaluation of two companies that operate within the same industry. In analyzing the main financial statement of the two companies, the researcher uses ratio analysis, vertical analysis, and horizontal/trend analysis. The selected firms are Bellway PLC and Redrow PLC. Both of these companies operate in the United Kingdom’s home construction industry. This appraisal comprises SWOT analysis for both Bellway and Redrow.

The two selected companies are described briefly in the introduction section and a fuller description is found at the Study section. Redrow PLC is an organization that is based in Britain and is involved in residential development. Redrow PLC own’s Harrow Estates, which is focused on property and land solutions (Redrow 2016; Cahill 2012). Bellway PLC is a holding company also based in Britain. It owns subsidiary undertakings and it mainly engages in building houses in Britain (Bellway 2016).

Research questions

  • Is Bellway in a better financial position than Redrow?
  • Which company is more profitable for investors between Bellway and Redrow?
  • Which of these two companies is better positioned to exploit the opportunities in its environment? 

Literature Review

The selected companies: Redrow PLC and Bellway PLC

Redrow PLC is a firm that is based in the United Kingdom. It is engaged in residential development. Redrow PLC own’s Harrow Estates, which is focused on property and land solutions (Redrow 2016). Redrow PLC is involved primarily in construction and building of residential properties. It provides its services only within the United Kingdom. Redrow PLC has a land bank of over 12,000 development lots giving the firm about 4-year supply of buildable land, which provides a buffer against abrupt increases in land prices (Redrow 2016).

Bellway PLC is a holding company that is based in the United Kingdom. It owns subsidiary undertakings and it largely engages in contructing houses in the United Kingdom (Bellway 2016). Bellway PLC has quite a few subsidiaries the main one being Bellway Properties Limited. Bellway PLC operates in England, Scotland and Wales only. It does not have operations in Northern Ireland. The land bank owned and controlled by Bellway PLC is roughly 34,070 plots (Bellway 2016).

In the 2015 financial year, Bellway sold in excess of 7,760 houses at an average price of roughly £224,000; about eighty percent of which were sold privately and the remainder being sold as social housing. Bellway PLC gives emphasis to sales volume growth and it frequently buys land particularly at low-cost at locations where it can develop (Bloomberg 2016).

Industry: Home Construction / Real Estate

Bellway PLC and Redrow PLC both operate in the United Kingdom’s home construction industry. This is because both companies are engaged in the construction of buildings: that is, they build and develop houses and homes. They construct and develop houses and homes of different types and sizes for diverse markets (Cave 2015; Lai 2013). The housing market in the United Kingdom has been growing steadily (Willer 2016). This steady growth is largely attributed to the aging UK population which increases demand for property overall (Everett & Duval 2010; Stewart 2013).

The long-term trend for house prices in Britain is upwards, although changes in the prices of houses are very cyclical (Cave 2015; Brennan 2013). In the housing market of the United Kingdom, about 250,000 new homes are needed to be built annually in order to stay abreast of the demand (Bourke 2012; Elliot 2013). Even though the construction sector in general in Britain has slowed down, the homebuilding sub-sector has seen a rise in the construction of new homes (Canocchi 2016; Cunningham 2012; Roxburgh 2011).

SWOT analysis

SWOT – strength, weakness, opportunity and threat – analysis is utilized in evaluating a company’s position and guide strategy going forward. Strengths – these are the qualities which determine a company’s success. Strengths allow an organization to attain its mission. Strengths could be intangible or tangible and include qualities and traits that staff members have as well as their flair which offers the company consistency (Everett 2014). Examples of strengths include no debt, workers who are committed, and huge monetary resources.

Weaknesses – these refer to the qualities which impede the productivity of a company preventing the company from attaining its mission and achieving its full potential. Even so, weaknesses can be controlled and the impact and magnitude of the damage could be decreased. SWOT analysis helps not just to identify the weaknesses of a company, but also provides a chance of reversing those weaknesses (Everett 2014). 

Opportunities – there are an extensive range of opportunities present in the environment where the company operates. An organization could always benefit from such opportunities, which could arise out of the market, technology or competition. It is notable that existing opportunities could be the utilization of novel technology, exploiting the company’s untapped resources, and failure of a competitor (Fine 2011).

Threats – these are the elements of vulnerability which could jeopardize the organization’s profitability and reliability. They are unavoidable and cannot be controlled. They have to be addressed so as to find a practicable solution (Pickton & Wright 2014).

Fine (2011) noted that a SWOT analysis is a vital part of the strategic planning process of an organization as offers a good all-round perspective of the forward-looking and current situation of the business. The Weaknesses and Strengths sections provide a look at the current position of the company whereas the Threats and Opportunities sections help in projecting challenges as well as possibilities going forward (Bensoussan 2013). SWOT analysis is a suitable tool for strategic planning.

As a result of the analysis, the business owner would be able to set organizational goals and objectives and obtain a clearer picture for basing his decisions on (Lu 2010). In addition, SWOT analysis helps the business owner to utilize a strategy to match the company’s opportunities and threats, and utilize those strategies to convert the threats and weaknesses of the company into its opportunities and threats (Bensoussan 2013). Although a SWOT analysis allows a business owner to identify and understand important issues that affect the company, SWOT analysis does not essentially provide solutions (Fine 2011).

Ratio Analysis Theory

This theory is relevant to the present research paper. Analysis of fiscal reports necessitates skill of statistical tools, accountancy, and mathematics. There are several fundamental ratios that could help anyone in analyzing an organization’s Profit & Loss Account and Balance Sheet for instance current ratio, provisioning coverage ratio, credit deposits ratio, debtors turnover ratio among others. A wide range of fiscal data could be obtained from Annual Reports, Profit and Loss Account, Audit Report, Balance Sheet, Bank Loan Statement, Bank Account Statement, and Income Tax Return.

Financial Statements

Common fiscal statements include cash flow statement, balance sheet, and income statement, and they are all interconnected. The cash flow statement explains cash outflows as well as cash inflows, and it reveals the amount of money which the business has available on hand, which is reported in the balance sheet also. The income statement is used in describing the way liabilities and assets were utilized in the stated accounting period (Routh 2014).

Every financial statement by themselves only offer a portion of the story of the fiscal condition of the business. When taken together however, the fiscal statements offer a more comprehensive picture (Putra 2015). Potential creditors and stockholders usually analyze the fiscal statements of a business organization and compute several fiscal ratios with the data they contain with the aim of identifying the fiscal weaknesses and strengths of the company and establish whether or not the firm is actually a good investment/credit risk (Kumara 2012). In addition, the fiscal statements of a company are usually utilized by the managers as it aids them in making decisions (Routh 2014).

One particular significant way in which the three fiscal statements are utilized together is in calculating free cash flow (FCF). Investors who are smart prefer business organizations which generate lots of FCFs. This is primarily because it signals the ability of the firm to pay off its debt as well as dividends, facilitate the company’s growth, and buy back stock – all vital undertakings from the perspective of an investor (Routh 2014). Even so, whilst free cash flow is an essential gauge of the health of the business, it actually has its limits; as Lan (2014) pointed out, free cash flow is really not immune to accounting trickery.   

Financial Statement Analysis

Financial analysis or financial statement analysis is the process in which the fiscal statements of a company are reviewed in order to make better financial decisions. Financial analysis focuses on analyzing a company’s income statement and balance sheet to interpret the business as well as the company’s fiscal ratios for fiscal forecasting, business evaluation, and even fiscal representations (Grimm & Blazovich 2016).

The main fiscal statements include Statement of Cash Flows, Balance Sheet, and Income Statement (Routh 2014). Financial analysis is a process or technique that involves certain methods for assessing fiscal health, performance, risks, as well as the company’s future prospects.

Financial statement analysis is utilized by many stakeholders including equity and credit investors, decision-makers with the company, the public, and even the government. These different stakeholders have various interests and they apply dissimilar techniques in meeting their needs (Lan 2014). Creditors, for example, want to ensure the principal and interest is paid on the debt securities of the organization whenever due. Equity investors are interested in the organization’s long-term earnings power and the growth and sustainability of dividend payments. Some of the common financial analysis methods include DuPont analysis, fundamental analysis, vertical and horizontal analysis, as well as the use of financial ratios. To project performance of the future, historical information combined with several adjustments and suppositions to the fiscal information might be utilized.

Methods of financial analysis

Ratio analysis

Financial ratios are essential tools for performing analysis of financial statements quickly. There are 4 different classifications of financial ratios: leverage, activity, profitability, and liquidity ratios. These financial ratios are usually analyzed across competitors within the industry and over time (Routh 2014). In analyzing the financial statement of a company using the ratio analysis method, various types of ratios are used.   

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Liquidity Ratios: these are utilized in determining how fast an organization is able to turn its assets into cash in the event that the business faces insolvency or fiscal challenges. In essence, liquidity ratios are a measure of the capacity of an organization to remain in business (Routh 2014). Some of the liquidity ratios include the liquidity index and the current ratio.    

Current ratio is used to measure the current assets of an organization against the organization’s current liabilities (Altman 2012). The current ratio is used in measuring the amount of liquidity that is available to pay for liabilities (Lan 2014). It is notable that the current ratio indicates whether or not the corporation is capable of paying off its short-term liabilities during a situation of emergency through liquidating its current assets (Lan 2014).

A low current ratio means that the company might find it difficult to pay its current liabilities within the short run hence it should be investigated more. If the current ratio is less than one for example, it indicates that even when the firm liquidates its entire current assets, it will still not be able to pay off its current liabilities (Routh 2014).

Quick ratio helps to compare the accounts receivable, short-term marketable securities, and the cash to the company’s current liabilities. If quick ratio is 0.55 for example, it means that the firm is only able to cover 55 percent of current liabilities by monetizing accounts receivable, liquidating short-term marketable securities, and utilizing all cash-on-hand (Lan 2014).

Cash ratio is computed as cash and short-term marketable securities divided by organization’s current liabilities. It is worth mentioning that a cash ratio of 0.31 will mean that the firm could only pay off 31 percent of its current liabilities with the use of its short-term marketable securities as well as cash.

Liquidity index is also one of the liquidity ratios although is not very popular. It is used to measure the period of time that is needed for converting assets into cash (Batta, Ganguly & Rosett 2014).

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Activity Ratios: these ratios essentially demonstrate how well the company’s top executives are managing the resources of the organization. Accounts receivable turnover and accounts payable turnover are some of the common activity ratios. They show the period it takes for an organization to get payments and how long it takes for an organization to pay off its accounts payable (Routh 2014). Other activity ratios include sales to working capital ratio, fixed asset turnover ratio, working capital turnover ratio, and inventory turnover ratio.

Profitability Ratios: these are ratios which show how profitable an organization is. The gross profit ratio and the breakeven point are some of the common profitability ratios. The breakeven point is used in computing the amount of money which the organization has to generate in order for it to break even with its start up costs (Knežević, Rakočević & Đurić 2011). The gross profit ratio shows a quick snapshot of the anticipated revenues.

Leverage Ratios: these show how much an organization depends on its debt in funding its operations. The debt-to-equity ratio is a popular leverage ratio utilized in analyzing financial statements (Johnson 2013). The debt-to-equity ratio depicts the degree to which the company’s top executives are willing to utilize debt in funding the company’s operations. It is computed as follows: (Leases + Short-term debt + Long-term debt) / Equity (Lan 2014).

Vertical analysis

Besides ratio analysis, the other method that can be used to analyze financial statements is the use of vertical and horizontal analysis. Vertical analysis, as Lan (2014) pointed out, reiterates every figure in the income statement as a percentage of net sales. Vertical analysis is important as it allows the top managers to understand if expenses such as Cost of Goods Sold (COGS) are very high in comparison to sales (Andrijasevic & Pasic 2014).

In essence, vertical analysis is the proportional analysis of a fiscal statement in which every line item on the fiscal statement is listed as a percentage of another item (Routh 2014). This essentially implies that each line item on the balance sheet is stated as a percentage of total assets whilst on the income statement, each line item is stated as a percentage of gross sales (Teodor & Radu 2013). All in all, vertical analysis brings about common-size fiscal statements. Boyd et al. (2014) noted that common-size income statements present each of the amount in the income statement as a proportion of sales.

Horizontal/trend analysis

This is used to compare ratios and account balances over various periods of time. It can be used, for instance, in comparing a company’s sales in 2012 to the company’s 2013 sales (Boyd et al. 2014).The financial analysis for the two companies is illustrated exhaustively in the Study section. The analysis includes the horizontal/trend analysis, vertical analysis, and ratio analysis (Monea 2013). The horizontal analysis entails comparing fiscal information over a number of reporting periods. Horizontal analysis is therefore the review of the results of several periods of time (Luypaert, Van Caneghem & Van Uytbergen 2016).

Financial statement analysis is important due to several advantages it presents to an organization. Firstly, financial analysis offers an idea to investors about deciding on investing their money in a certain business organization (Damjibhai 2016). Secondly, various regulatory authorities such as IASB could ensure that the business organization is in fact following the necessary accounting standards (Routh 2014).

Therefore, the analysis enables the company to remain compliant (Ednlister 2012). Thirdly, the analysis of financial statements helps government agencies to analyze the taxation that is owed to the company (Beutler 2014). Fourthly, financial statement analysis enables the company to analyze its own performance over a certain period of time (Routh 2014).

References

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Accounting Standards

Accounting Standards
Accounting Standards

Accounting Standards

Abstract

Globalization has closely linked different markets. With the rise in globalization and market integration, there is a quest to establish a set of global accounting standards. Though progress has been made in establishing a common set of accounting standards, the process still faces challenges that have made it impossible to establish common accounting standards. This paper addresses there benefits of having converging the accounting standards and goes ahead to look at the challenges that make it difficult to converge the accounting standards.

Accounting

Introduction

The rise in globalization has led to the quest to achieve common international accounting standards. Financial users around the world are working towards establishing a common set of worldwide accounting standards though it is yet to be accomplished. This is unfortunate given the many benefits of adopting common accounting standards all over the world.  Establishing the same accounting standards would mean that each organization prepares financial statement using the same rules.

This would make it easier for users of financial statements to compare the financial position of different companies. The use of a similar set of global standards would improve the quality of financial reporting. Companies around the world would follow the same high-quality standards and they would have to adhere to these rules hence the quality of financial reporting would improve around the globe.  Using a similar set of global standards would enhance efficiency and reduce the cost of capital.

The allocation of funds of companies around the globe would reduce the cost of and enhance efficiency. However, even in light of these benefits of having global accounting standards, the world is yet to achieve common accounting rule. For the last two decades, financial experts have been working towards achieving similar accounting standards without success. Progress has been made but there are still notable differences in financial reporting between countries. Part of the reason the common global accounting standards have not been achieved is due to sovereignty of nations.

Countries feel that having one set of accounting standards would undermine the sovereignty of a nation. This termed as westernization by various nations who feel that the western countries have a tendency to impose rules on other countries. The second challenge is lack international regulatory body that would be used to implement the international accounting standards. Despite the challenges, the world needs to look for a workable solution and converge the accounting standards to enjoy the benefits of a common set of global accounting standards.

Reason the world Need International Accounting Standards

Financial reporting standards around the globe are different, and this creates inconsistency in financial reporting. Today, the world economy has become integrated. Globalization is on the rise, and every market is connected to the other market.  Globalization closely links markets together, and effects felt in one market are felt in other markets in different countries (Albrecht, Stice, Stice, & Swain, 2014).

Furthermore, countries are coming together to create economic blocs as each country is realizing the need to integrate and form a single market without barriers. As the world is converging and becoming one market each day, financial expert are also looking for a way to remove the inconsistency in financial reporting. The inconsistencies are a major setback to the users of financial reports. Investors rely on financial statements to make investments decisions.  Globalization has encouraged investors to invest in global companies.

However, inconsistency in financial reporting makes it difficult to get the right information. A company located in different countries follows different accounting standards to prepare its financial reports hence it becomes difficult to make sense out of different financial reports provided. There is a need to achieve consistency and ensure that investors are provided with the right information when making decisions around the globe.

International convergence is a concept that was established in the 1950s after the Post World War. It was round this time that countries started creating strong economic blocs that eliminated tariffs and reduced the requirements to move across nations. The integration and diversity of the world increased the cross-border capital flows increasing the need to converge the accounting standards.

Previously, the world had been working towards harmonization of accounting standards but with the integration, it was clear that convergence was appoint of urgency (Horton, Serafeim, & Serafeim, 2013).  Different countries sought to come up with the same reliable accounting standards that would be used to represent information of organizations operating in major capital markets.

This led to the formation of the International Accounting Standards Committee which is the modern day International Accounting Standards Board. IASB has made progress in the quest for a unified global accounting standard. This board came up with international financial reporting standards (IFRS). The IFRS is used in more than 100 countries most of them are European Union member states.

Benefits of Having Common Accounting Standards

Comparability

Comparability is one of the greatest advantages of using financial statements. Financial statements are used to indicate the performance of an organization. A person wishing to evaluate the performance of an organization should critically look at the financial records. Financial statements provide a summary of financial position making it possible for investors to understand the position of a company.

However, when companies use different accounting standards, it becomes difficult to understand the financial reports (Atrill & McLaney, 2012). A company in China and a company in the United States will use different accounting standards making it difficult for financial reports users to compare the performance of companies. Using global accounting standards would make comparability a reality.

Items located in financial reports would be similar, and an individual comparing the performance of different companies would compare the essential parts of the reports (Christensen, Lee, Walker, & Zeng, 2015). Users of financial reports can be able to compare important aspects of a business such as liquidity, credit worthiness, profitability, and solvency.

Comparability is not limited to different companies. There are companies operating in different countries. For instance, General Motors, and Mac Donald are operating in different parts of the world. The multinationals have many subsidiaries around the world that use different accounting standards. The companies must adhere to the local accounting standards of each country that they operate in (Drury, 2013).

This makes it difficult for organizations to compare the financial reports of same organization but located in different countries. With international accounting standards, the organizations can be able to measure the performance of each entity regardless of its geographical location. Additionally, the companies would be able to consolidate the financial reports easily and understand how each of entity contributed to the overall performance of the organization.

Improve Quality of Financial Reports

At the top of agenda of the ISAB is to improve the quality of financial standards. The IFRS was established to enhance the quality of financial reports across the world. A global set of accounting standards would be high quality standards (Crosson & Needles, 2013). As much as countries are willing to converge to same accounting standards, they are not willing to compromise the quality of financial reports.

Quality financial reports would provide the user of financial reports with the right information. Investors can make the right investment decision when provided with the right information. If companies across the world would follow high-quality accounting standards, then the financial information provided would be clear, useful and relevant to the users of financial reports.

The cases of the financial crisis of 2008 make it critical to have reliable and quality accounting standards. The financial crisis which affected the world’s strongest economies was caused by lack of adequate regulation where companies provided misleading financial information. A single set of global standards would improve the quality of accounting standards. Companies would not find a loophole to mislead users of financial reports since the global standards are clear and target to ensure that financial report represent the true position of a company.

Companies that have embraced the IFRS have improved the quality of financial reporting. A report released by the IASB indicated that the IFRS has improved the quality of financial reports (Crosson & Needles, 2013). The report further indicated that capital market participants and investors who use information prepared using the IFRS standards get the right information and can be able to evaluate the financial position of different companies use the international standards.

Simplification

Implementing unified financial reporting standards would not only enhance comparability, but it would simplify financial reporting. This is especially true for organizations that have subsidiaries around the world. The companies prepare different financial reports that adhere to local standards but at the end of the day the organizations have to consolidate the financial reports (Becker, Schäffer, & Thaten, 2015). It is difficult to consolidate financial reports prepared using different rules. This is because the items are not represented and accounted for the same way.

The items represent in one financial report in one country may differ from the items of another country making it difficult for multinationals to consolidate the financial reports. Additionally, without converged financial accounting standards, the countries are forced to prepare financial reports using different currencies such as yens, pounds, and dollars depending on the locality they operate (Brochet, Jagolinzer, & Riedl, 2013). It becomes difficult to consolidate the financial reports because they have to consider the foreign exchange rates. 

Financial reports simplify the process of mergers and acquisition. Companies are looking to make strategic mergers and acquisition to increase their market share. Mergers and acquisition are becoming prevalent today as companies globalize (Bradshaw, 2010). Companies are establishing mergers to launch products successfully in new markets. Using global accounting standards would enable companies to make the right mergers and acquisition. The companies can be able to look at financial reports comprehensively and compare the results with ease enabling them to make sound decisions.

Reduction in Cost of Capital

Shifting from locally accepted principles to international reporting standards will reduce the cost of capital. Research conducted on the EU nations showed that using a the same accounting standards has boosted the net income by 25%. Companies recorded a rise in earnings before taxes and depreciation. A second study that focused on 30 European organizations showed that the application of the same accounting standards increased profits by $30 billion (Albu & Alexander, 2014).

Implementing similar accounting standards across the world indicates that companies allocate capital more efficiently, and the markets would be more efficient. International accounting standards would also converge the regulation of financial reports hence companies would strive to be efficient. To be ahead of competitors and to attract investors companies would enhance efficiency hence global market would be more efficient.

Challenges

Differences in Accounting Practices in Different Countries

Publicly held countries use the generally accepted accounting principles. Different countries have accepted various accounting principles which are recognized by the different nationals. Research indicates that over 132 countries have so far embraced the IFRS, but there is still a difficult in implementation (Wang, 2014). Countries are not implementing the IFRS standards in the same manner because they have national accounting standards. For instance, the U.S. has U.S. Generally Accepted Accounting Principles (GAAP) and the U.K. use the U.K. GAAP.

Since 2005 Japan started converting to the IFRS from the Japanese Generally Accepted Accounting Principles. However, there are still notable differences between the ways countries treat financial reports. For instance, the United States and United Kingdom accounting standards are stock market oriented because the foreign companies based in these countries rely on the stock exchange as a source of finance.

On the other hand, the accounting standards of Japan are bank oriented because companies rely on bank loans and not willing to participate in stock markets. Japan and the U.K. are guided by different accounting laws. For instance, the United Kingdom is guided by the common legal system while Japan is guided by the code and civil legal system. The differences in accounting practices make it difficult to find one single accounting standards. Countries are not willing to abandon their way of doing things to adopt a new single set of accounting.

For instance, the United States was hard hit by the financial crisis. The country established the Sarbanes Oxley law which increase regulation and specifically focuses on financial reporting. This means that companies in the United States must follow the U.S. GAAP and meet the legal requirements in financial reporting as stipulated by various laws concerning financial reporting (Arnold, 2013). It is difficult for companies to adopt a common set of accounting standards because there are local accounting standards that are unique to each country and laws that must be met.

The generally accepted accounting standards and the International accounting standards treat items of financial reports differently. For instance, there is a distinction in the way the U.K GAAP and IFRS treat leases. The IFRS requires a company to capitalize leases as long as the lease term is major part of the assets economic life. Conversely, the U.K. GAAP requires a company to capitalize a lease as long as the term of the lease is equivalent to 75% of the asset’s economic life (Horton, Serafeim, & Serafeim, 2013).

Converging the different accounting practices of different countries is a big challenge. Countries already have their accounting principles and the way they treat different items such as the lease in the example above is different. It is a big challenge to harmonize the accounting standards and find a set of standards that will be accepted by different countries (DeMiguel, Nogales, & Uppal, 2014).

Sovereignty

The politics of the pride of a nation and sovereignty has worsened the chance of achieving global accounting standards. Establishing a global set of standards would impose accounting standards on countries. The global set of accounting standards has already come under criticism because it undermines the sovereignty of nations. Financial experts in the United States released a report that revealed that a global set of financial standards would impact on the quality of financial report negatively (Weil, Schipper, & Francis, 2013).

The experts argued that global set of accounting standards replaces comparability with quality. The report indicates that the current accounting standards in the United States focus on the quality of financial reports and adopting other standards would undermine the sovereignty of the nation and at the same time lower the quality of financial reports.

The global accounting set of standards has been criticized as western dominance.  The Western countries have often been criticized of imposing rules and regulations on countries. The wave of democratization, for instance, has been cited as a move by West to dominate (Arrow & Lind, 2014). When coming up with the global accounting standards, the West is actively involved and poor countries do not get to contribute adequately. When the accounting standards are imposed on other countries, it strips them the ability to establish different accounting standards that are unique to the situation.

Lack of Regulatory Body

Though more than 130 countries have adopted the IFRS, there are notable differences financial reports. This is because there is no regulatory body that ensures that each country strictly follows the accounting standards. There is no international regulatory body that can mandate countries to adhere to accounting process. According to Scott (2012), to achieve consistency in the preparation of financial report, there must be an international regulatory body. The regulatory body should oversee the implementation of converged accounting standards.

Additionally, it would be in-charge of dealing with companies that fail to comply with the accounting standards.  The regulatory body should be endowed with the authority to regulate both public and private entities to ensure that financial reports meet the international standards. Without the regulatory body, it is impossible to achieve consistency and ensure that all companies are using the same set of global standards.

The Costs of having Global Set of Standards

Having a worldwide accepted  accounting standards would increase the cost of accounting in various companies. First, establishing a global set of standards would require that accountants worldwide are retrained. The accountants must be trained on how to prepare the financial accountants using the new accounting standards (Brigham & Ehrhardt, 2013).

Companies would have to incur the costs of retraining the accountants in order to adhere to the new set of accounting standards. The second cost is that failure in the accounting system would cause a worldwide failure. Leiwy and Perks (2013) stipulate that a failure in the accounting standards would cause accounting standards at the same time.

Conclusion

Getting a set of global accounting standards has definitely been at the top of agenda of the IASB in the last decade. Amidst the challenges this course changes there are doubts as to whether it is still possible to attain the global accounting standards. The pride of nationalism and politics of sovereignty make it difficult every day to achieve a single set of global accounting standards.

Every country wants to maintain certain aspects of its accounting standards making it difficult to come up with a common set international accounting standard that will be widely accepted. The world lacks an international regulatory body that will be in charge of implementation and ensuring companies comply with the laws. Lastly, the differences in accounting practices across countries make it impossible to establishing similar accounting standards.

However, there are numerous benefits of applying the same accounting standards. They include comparability, enhancing market efficiency, simplification and improving the quality of financial accounts. In light of these benefits, countries should work together to find a solution and establish a common set of international accounting standards.

Reference List

Albrecht, W., Stice, J., Stice, E., & Swain, M. 2014. Accounting: Concepts and Applications. London: Cengage Learning.

Albu, C., & Alexander, D. 2014. When global accounting standards meet the local context—Insights from an emerging economy. Critical Perspectives on Accounting, 25(6), 489-510.

Arnold, G. 2013. Corporate Financial Management (5th ed.). Pearson Education Limited.

Arrow, K. J., & Lind, R. C. 2014. Uncertainty and the evaluation of public investment decisions. Journal of Natural Resources Policy Research, 6(1), 26-44.

Atrill, P., & McLaney, E. 2012. Accounting and Finance for Non-specialists. Wales: Pearson Education.

Becker, S., Schäffer, U., & Thaten, M. 2015. Budgeting in times of economic crisis. Contemporary Accounting Research., 1-12.

Bradshaw, M. 2010. Financial Reporting, Financial Statement Analysis and Valuation: A Strategic Perspective. New Orleans: Cengage Learning.

Brigham, E., & Ehrhardt, M. 2013. Financial management: theory & practice. New York: Cengage Learning.

Brochet, F., Jagolinzer, A., & Riedl, E. 2013. Mandatory IFRS adoption and financial statement comparability. Contemporary Accounting Research, 30(4), 1373-1400.

Christensen, H., Lee, E., Walker, M., & Zeng, C. 2015. Incentives or standards: What determines accounting quality changes around IFRS adoption? European Accounting Review, 24(1), 31-66.

Crosson, S., & Needles, B. 2013. Managerial Accounting. London: Cengage Learning.

DeMiguel, V., Nogales, F. J., & Uppal, R. 2014. Stock return serial dependence and out-of-sample portfolio performance. Review of Financial Studies, 27(4), 1031-1073.

Drury, C. 2013. Cost and Management Accounting: An Introduction. New York: Cengage Learning.

Horton, J., Serafeim, G., & Serafeim, I. 2013. Does mandatory IFRS adoption improve the information environment? Contemporary Accounting Research, 30(1), 388-423.

Leiwy and Perks. 2013. Accounting: understanding and practice 4th Edition. New York: McGraw-Hill.

Scott. 2012). Accounting: understanding and practice 4th Edition. New York: McGraw-Hill.

Wang, C. 2014. ccounting standards harmonization and financial statement comparability: Evidence from transnational information transfer. Journal of Accounting Research, 52(4), 955-992.

Weil, R., Schipper, K., & Francis, J. 2013. Financial accounting: an introduction to concepts, methods and uses. San Francisco: Cengage Learning.

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Price Analysis for the Navigation System

Price Analysis for the Navigation System
Price Analysis for the Navigation System

Price Analysis for the Navigation System

Hi-Delta is a new company to provide drone navigation systems that the U.S government looks for more often and its aim is to dominate in the production of navigation systems used in aircrafts. The systems provided by Hi-Delta will comply with the Federal Acquisition Regulations (FAR). According to the plan, there will be a building in a warehouse-area that rents its headquarters and will be located in Philadelphia area for the whole operation of the company.

The company’s office will have employees working in different departments. These employees are the CEO, Directors, General Managers and their assistants, Accountants and tax preparers, receptionists, manufacturers and security guards. These employees will offer services that improve and build up the services of the federal government.

The main objective of the company is to acquire the much needed supplies and services of the appropriate navigation systems to the government. Hi-Delta focuses on giving most appropriate cost quotations for its navigation system products to the federal government, therefore motivates the government in ordering and purchasing navigation systems in bulk for the whole military.

The products which Hi-Delta is the GPS system for navigation and other products which includes; tracking devices, text to speech navigation systems, Bluetooth navigation systems, hands-free systems for navigation, smart watches, traffic products, along with map products. A part from the federal government Hi-Delta also targets established companies which deal with manufacture and development of air crafts and also companies that manufacture cars and phones, because they will require installation of navigation systems to their products.

 Price analysis, without doubt is an important aspect as far as contracting is concerned. The contracting factors  that Hi-Delta will focuses on in order to get a contract from the federal government include; contract changes, initial offers, and final statements. The price analysis is basically the process of examining and evaluating an intended price without putting into consideration the separate cost of elements. In essence price analysis for the navigation system does not consider the profits to be earned.

At Hi-Delta Company the method to be used in analyzing the price includes the comparison of the prices that are being submitted, comparing the price quotations and contracts submitted previously with the current prices and quotation for the similar products and services, comparison of proposed prices that puts into consideration the independent cost estimates put across by the US government, and comparison of published prices set forth on a competitive basis.

The method chosen for Hi-Delta Company is based on number of factors such as speculation of efficiency of the federal government in achieving its objectives. It also aims at conducting speculations regarding anticipated global changes in systems for navigation.

The main cost which Hi-Delta company has priorities in the pricing strategy is the cost of manufacturing. The cost of manufacturing is particularly high since the direct inputs required for the building of unmanned, manned system including aircrafts, space systems and technology is too costly (Adithan, 2014). Equally, this field requires experienced and hands on professionals who have a deep understanding of the navigation systems. The cost of employing such personnel is who will be directly involved in manufacturing and monitoring the navigation system is too high.

Also, product costs are important for Hi-Delta as they form an essential aspect when it comes to pricing. For a Hi-Delta to determine its appropriate cost incurred during the production of navigation systems, it is imperative that the product costs be considered and in so doing evaluation appropriate inventory evaluation should be done.

Cost classification entails separation of expenditures into various groups. For example, expenses in accounting can be divided into two categories, that is direct and indirect costs while in economics it may have variables, fixed, production, and opportunity cost. I would compare my prices and costs of my company with those already on the market which does the same business as mine i.e. the navigation system of other resembling business in the market. The price is the key to the summation of profits and the cost, and so the price forecasting which Hi-Delta depends will be prices comparison in the market putting in mind that competitive companies like Vector Cal offers.

For the startup phase of Hi-Delta Company, the company will incur two types of costs namely variable and fixed costs. Variable costs keep changing while the fixed costs always remain the same. This means that fixed cost does not depend on the output. The company incurs fixed cost in the production of any number of the navigation systems. For instant, when it produce one or a million. When the sales level increases it does not affect the fixed cost in any way. Fixed cost are very inelastic unlike variable cost this so it is essential for the company to know the revenue needed for it to achieve the economic balance.

Variable costs are costs that vary depending changes in the production output. They vary depending on the company’s production volume; they rise as production increases and falls as production decreases (Hilton et al., 2013). It includes direct material costs or labor costs. Variable cost ratio is an expression of a company’s variable production costs as a percentage of sales this is calculated as variable costs divided by total revenues.

The variable cost calculation can be done on a per-unit basis, such as a $20 variable cost for one unit with a sales price of $200 giving a variable cost ratio of 0.1 or 10%, or by using totals over a given time period, such as total monthly variable costs of $1000 with total monthly of $10000 also rendering a variable cost ratio of 0.1 or 10%. Since the variable cost ratio quantifies the relationship between revenues and the specific costs of production associated with the revenues my plan has taken care of various challenges that are likely to be incurred.

            Hi-Delta Company has taken into account, writing the fallback strategy as to cater for risks and to reduce the company’s unnecessary expenditure. Examples of variable costs include the cost of raw material and packaging. Increases or decreases in variable costs occurred without any direct intervention or action on the part of the management of the company. It increases in fairly constant rate in proportion to increases in expenditures on raw materials or labor. Hi-Delta is expected to perform detailed and conclusive research, and this implies that efficient and appropriate resources will be required for the exercises.

An instrumental component of analyzing prices is cost allocation standard. It is significant that every business uses this strategy. Cost allocation strategy 418 and 410 is an imperative method as far as businesses are concerned (Mariotti & Glackin, 2013). The main reason is that the method can allow Hi-Delta to calculate the total expenses incurred for the start-up including direct and indirect costs. In addition, the standard allocation 408 is imperative as it deals with analyzing the cost related to employees. Whenever cost analysis is performed for a business, the US government requires that the cost principles should be used in pricing negotiated supply, service, experimental, and developmental and research contracts modifications.

References

Adithan, M. (2014Process planning and cost estimation. New Delhi: New Age International (P) Ltd., Publishers.

Hilton, R. W., Maher, M., & Selto, F. H. (2013). Cost Management: Strategies for business decisions. Boston, Mass: McGraw-Hill.

Mariotti, S., & Glackin, C. (2013). Entrepreneurship: Starting and operating a small business. Upper Saddle River, N.J: Pearson/Prentice Hall.

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An Amortization Schedule

An Amortization Schedule
An Amortization Schedule

An Amortization Schedule

An amortization schedule refers to a tabular presentation of the mortgage loan payment schedule, indicating the interest and principal amount paid until the loan is repaid fully (Brechner & Bergeman, 2014). An amortization calculator is used in developing the schedule, based on the amount, interest rate and repayment period. The amortization schedule is generally utilized for identifying the amount paid, to both interest and principal, and the outstanding balance.

An amortization schedule helps in the generation of identical payment over the repayment period, such that the entire amount is paid by the end of the period (Biafore, 2013).

The schedule is used in determining the percentage of interest to be paid during each period in comparison to the principal amount to be repaid. In essence, it separates the portion of payment that covers the interest expense from the portion the premium paid to the principal in each period. Biafore (2013) notes that even though a similar amount of premium is paid towards the mortgage each period, the amount allocated to the principal and interest varies each time.

This variation can be observed from the amortization table. The amortization schedule ensures that the borrower and lender are on the same page with regards to the amount repaid and amount owed. This means that in case of any dispute, the schedule acts as reference on the history of payment and pending balances.

The amortization table is useful to the borrowers in that it is a basis for organizing their finances. The borrower is able to track payments made, interest paid and money owed at any given time; such that they can determine their home equity at any given time. Lenders on the other hand can track what is owed by borrowers.

Response 3

            In amortizing the mortgage, a significant amount of the payments paid during the initial months mostly comprises of interest, while the remaining amount is paid to the principal (Biafore, 2013). The payments to interest then start declining as the mortgage is repaid, such that the interest paid in the later years is minimal or none.

Accordingly, the tax deducted based on home mortgage interest is likely to be higher during the initial years when a larger amount of interest is being paid, compared to later years when the interest being paid has reduced significantly. In this regard, it is logical to state that interest paid in earlier years plays a more helpful role in in tax reduction than interest paid in forthcoming years.      

Response 4

            An ordinary annuity differs from annuity due, mainly based on the timing. While the amount due in ordinary annuity is paid at each period end, an annuity due consists of cash flow series that occurs at each period’s beginning. The second difference is related with payment. In ordinary annuity, the payment done is associated with the period that precedes its date (Ehrhardt & Brigham, 2016).

Examples include mortgage payment, loans and coupon bearing bonds. Payment in an annuity due on the other hand, is associated with the period that follows its date. Examples include insurance premiums and rental lease payments.

Problems

  1. If interest rates are 8 percent, what is the future value of a $400 annuity payment over six years? Unless otherwise directed, assume annual compounding periods.

Future Value (FV) = P x [((1 + r) n – 1) / r]

Where P = Annual payments

            r = Interest rate

            n = Number of years

FV = 400 x [((1 + 0.08)6 -1)/ 0.08]

= $2,934.37

Recalculate the future value at 6 percent interest and 9 percent interest.

6% Interest

FV = 400 x [((1 + 0.06)6 -1)/ 0.06]

= $2,790.13

9% interest

FV = 400 x [((1 + 0.09)6 -1)/ 0.09]

= $3,009.33

  • If interest rates are 5 percent, what is the present value of a $900 annuity payment over three years? Unless otherwise directed, assume annual compounding periods.

Present Value (PV) = P [(1 – (1 / (1 + r)n)) / r]

Where P = Annual payments

            r = Interest rate

            n = Number of years

PV = $900 [(1 – (1/(1+0.05)3))/0.05]

= $2,450.92

   Recalculate the present value at 10 percent interest and 13 percent interest.

10 Percent

PV = $900 [(1 – (1/(1+0.1)3))/0.1]

= $2,238.17

13 Percent

PV = $900 [(1 – (1/(1+0.13)3))/0.13]

= $2,125.04

  • What is the present value of a series of $1150 payments made every year for 14 years when the discount rate is 9 percent?

Present Value (PV) = P [(1 – (1 / (1 + r)n)) / r]

Where P = Annual payments

            r = Interest rate

            n = Number of years

PV = $1150 [(1 – (1/(1+0.09)14))/0.09]

= $ 8,954.07

 Recalculate the present value using discount rate of 11 percent and 12 percent.

11 Percent

PV = $1150 [(1 – (1/(1+0.11)14))/ 0.11]

= $8029.15

12 Percent

PV = $1150 [(1 – (1/(1+0.12)14))/ 0.12]

= $7,622.39

References

Biafore, B. (2013). QuickBooks 2014: The Missing Manual: The Official Intuit Guide to QuickBooks 2014.  Sebastopol, CA: O’Reilly Media, Inc.

Brechner, R. & Bergeman, G. (2014). Contemporary Mathematics for Business and Consumers, Brief Edition. Boston, MA: Cengage Learning.

Ehrhardt, M. C. & Brigham, E. F. (2016). Corporate Finance: A Focused Approach. Boston, MA: Cengage Learning.

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Budget Planning and Management Role in Health and Social Care

Budget Planning
Budget Planning

Budget Planning and Management Role in Health and Social Care

Managing Financial Resources in Health and Social Care

2.1 Power Point Presentation Discussion

This presentation shall discuss section 2’s Budget Planning and Management Role in Health and Social Care. Specifically, the speaker shall provide the Diverse Sources of Income that can be used in health and social care settings. Every budget planning includes internal sources and external sources, no matter what is the setting.

The organization shall use internal sources and external sources as diverse sources of income. Internal sources shall include Company Savings, working capital, retained profit, and sales of assets.

Company Savings or commonly known as the owner’s investment (can be used as a start-up capital or additional capital)

Another interesting source of finance is using the working capital. These are funds that are needed when conducting daily operations, like wages, purchasing of raw materials, covering some overhead costs and used for offering credit services.

Retained profit can be used within the organization, from a standpoint, this is an attractive source of finance because it allows investment projects without risking nor involving shareholders or any outsiders.

Sales of assets are one way of raising finance. Selling off the stocks or assets that are no longer in need. Such as equipment that is not in used can be sold off to buy new equipment.

The next slide is the discussion of the external sources of finance. These are finances that are commonly gained outside of the organization, such as from banks or creditors. This may include the short-term and the long-term assets.

Short-term assets are financial assets that need to be sold, converted to cash or liquidated to pay the liabilities inside one year. These assets include Loans, Trade Credits, and Debt Factoring.

Loans are usually long-term debt capital used by the company to provide a cash-flow cushion. Moreover, with bank loans, the organization can set repayments with spreading over a period of time which can be good for budgeting.

Trade Credits, shall cover the organization’s short-term finances. This is where suppliers can deliver goods and willing to wait for days before the payment. If this shall be included within the organization’s budgeting, this will provide more chance for the organization to prioritize the needed equipment or services that should be sold.

Debt Factoring or Factoring is where the organization can sell their invoices to the banks. Rather than waiting for 28 days of full payment, the organization can gain cash right away.

Now, Long-term assets are finances that can be paid over many years. This will include, mortgages,  venture capital, retained earnings, debenture for long-term sources.

Now, if the organization wanted to secure a location, mortgaging is the best answer. This is advantageous since this can be repaid through installments over a period of time, mostly over 25 years. If we view the setting as a public or private institution, then it would be feasible to mortgage a specific location than renting it.

For a starting organization, venture capital can provide sufficient fund to the organization. Moreover, it is also feasible for new businesses with limited profits, especially with public health and social care setting.

Retained earnings are useful to finance new investments, either on new programs within the organization or new facilities. Moreover, it is believed that retained earnings are sources of funds that does not lead to payment of cash.

Having able to induce debenture as an external source of income, it will save the organization income tax since debenture is a tax deductible expenditure. Moreover, it is way cheaper than preference shares and equity shares.

Since we are imposing health and social care setting, the organization aims to provide more efficient but cheap services; the organization may also use Government funding, Bursaries, Grants, Rentals, and Company assets.

There is government organization such as Invest NI funds new and established businesses in their venture. Which is believed that since the organization, shall cater health and social care for elderlies and with special needs, the government shall heartfully fund this newly established institution. Moreover, there are also charities that can assist the organization in the further development of the institutions.

Leasing or renting an asset will allow the business to obtain assets without the need to pay a large lump sum. For example, the organization may pursue on letting their clients rent some equipment for the benefit of the institution.

2.2 Factors that Influences the Availability of financial resources

            The organization may experience difficulties in achieving the desired resources through the identified factors such as funding priorities, agency objectives and policies, private finance, type of services, government policies, and etc.

            Decision making on funding priorities is usually formalized, procedurally driven, sequential, and protected; thus, the size of the organization may affect the board’s decision on funding the organization’s needs.

            Moreover, the agreements between association and local about funds, service contracts and authorities together with other home care agencies. Provision of the type of service, such as Nursing, residential and private services. Lastly, geographical locations of the organization, any geographical constraints may greatly affect the entire organization.

2.3 Different types of budget expenditure on the proposed health care organization

            Budget Expenditures includes; Operational Budget, Cash Flow Budget, and Capital Budget. Wherein, the operational budget is recorded at the beginning of the year for different expenditures related to the organizations daily operations. Organization’s cash flow budget may include the budgets allocated for everyday outflowing and incoming services. Capital Budget, on the other hand, is a budget that is allocated to pay for exclusive purchases and specific projects allocated for the organization’s health and social care services.

2.4 Decision about expenditures made within health and social care organization

            The expenditures of the organization can be determined through extensive budget preparation and how the organization will implement several expenditures. However, before budget preparation, the organization must determine the organization’s financial status. And after identifying the financial status, it is empirical for the company to prioritize its goals and objective.

            The organization must assign specific roles and responsibilities of varied people for the purpose of the budget. Thus, the management must include the timely preparation and accurate budget for the income. Finally, health care managers and executives must include the process of specific budgeting to avoid unwanted errors. This may include draft the budget, reviewing points of the budget, presenting the drafts for approval and if approved, it is appropriate to document the budget for final implementation.

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Health care cost: Burden to low income earners

health care cost
health care cost

Financial Management

Health care cost

Patient care financial problem is one of the reasons why today’s populations are unable to receive high quality care that they need to achieve improved health outcomes. The problem of huge health care cost is a big burden to low income earners who always lack adequate finances to purchase drugs and to pay for hospital bills (Kelley, McGarry, Georges, and Skinner, 2015). It becomes even worse for patients who are suffering from chronic health conditions such as diabetes and cancer.

According to Kelley et al., (2015), dementia is one of the chronic diseases that are attracting large social costs for patients in the United State. For this reason, being a fatal health condition, many dementia patients in the United States are dying due to patient care financial problem. Patient care financial problem has an impact on federal and national budgets. Nurses play a very big role in ensuring that patient care financial problems are integrated into the national and federal budgets by analyzing information that may be required for budget development (Luga & McGuire, 2014)

Health care cost: Heath insurance

Lack of health care insurance and high costs of prescription drugs are the most common patient care financial problems in today’s society. According to Saksena, Hsu and Evans (2014), health care coverage helps to protect patients from financial risks, and lack of it becomes a big burden for many populations. In addition, paying for health care through out-of-pocket payments prevents many people around the world from accessing care.

Although lack of health care insurance is a financial problem for patients, it is always associated with both non-financial and financial health-related impacts to public health. For instance, limited access to quality health care as a result of lack of health care coverage, results into negative health outcomes for the population. This is a good example of a non-financial impact associated with lack of health insurance (Luga & McGuire, 2014).

With regard to financial-related impact, an increase in disease burden among populations is of great financial impact to the public health sector, which must allocate additional funds to clear disease from the society (Saksena, Hsu and Evans, 2014).

The other financial problem that is related to patient care is high costs of prescription drugs. Many patients and their families really have to struggle in order to meet health care costs, especially medication costs. According to Walkom, Loxton, and Robertson, (2013) in a study conducted with the aim of assessing the impact of high medication costs on patients’ ability to adhere to prescription drugs, it has been discovered that 27 percent of participants from Australia and 36 percent of subjects from the United States tend to skip their drug doses because they are unable to purchase drugs which are charged at extremely high prices.

In addition, the need to purchase prescription drugs through out-of-pocket payments is one of the contributing factors to poor health among populations in today’s society (Luga & McGuire, 2014).

Lack of insurance as well as high costs of prescription drugs have an impact on federal and national budgets. This is because the government has to integrate health care costs into its budget to help low income earners to access care and to achieve improved health outcomes (Saksena, Hsu and Evans, 2014). According to Saksena, Hsu and Evans (2014), the number of uninsured citizens is on the rise in the United States because many people are reluctant to join available Medicare and Medicaid programs following increased uncertainties that continue to surround their use.

If the current trend persists, the federal government will be compelled to integrate patients’ health care costs into its budget in order to increase the percentage of United States citizens who receive quality care. As Kelley et al., (2015) explain, there is great need for the federal government to increase budget that it allocates for helping the society to manage chronic illnesses, considering the fact that chronic health conditions become more severe among the uninsured patients than among patients with health care coverage.

Similarly, high costs of prescription drugs have an impact on federal and national budget because the government has to increase its spending on these drugs to promote positive health among its population, especially the low income earners (Luga & McGuire, 2014).  

Nurses play a very crucial role in solving patient care financial problems because they are charged with the responsibility of analyzing public health information that is needed for budget development. The federal government depends on information collected by nurses regarding health care costs to make a decision on the most appropriate funds that should be allocated for patient care (Salmond and Echevarria, 2017).

In order to ensure that the right information is used for budget development, nurses must be sure to collect accurate and specific information as this will help the government to distinguish between funds that are allocated for health care coverage from those that are designated for prescription drugs. The staff nurse plays the role of collecting data directly from the community and presents it to the nurse manager.

The nurse manager analyzes the presented information and evaluates its relevance before passing it to the chief nurse. The chief nurse analyzes the information and forwards it to the agencies responsible for budget development, stating the reasons why it should be included in the budget (Salmond and Echevarria, 2017).

References

Kelley, A. S., McGarry, K., Georges, R. & Skinner, J. S. (2015). The burden of health care costs for patients with dementia in the last 5 years of life. Annals of International Medicine, 163(10): 729-736. doi: 10.7326/M15-0381.

Luga, A. O. & McGuire, M. J. (2014). Adherence and health care costs. Risk Management and Healthcare Policy, 7: 35-44. doi:  10.2147/RMHP.S19801

Salmond, S. W. & Echevarria, M. (2017). Healthcare transformation and changing roles for nursing. Orthopedic Nursing, 36(1): 12-25.  doi:  10.1097/NOR.0000000000000308

Saksena, P., Hsu, J. & Evans, D. B. (2014). Financial risk protection and universal health coverage: Evidence and measurement challenges. PLoS Med, 11(9): e1001701. https://doi.org/10.1371/journal.pmed.1001701

Walkom, E., J., Loxton, D. & Robertson, J. (2013). Costs of medicine and health care: A concern for Australian women across the ages. BMC Health Services Research, 13: 484. doi:  10.1186/1472-6963-13-484

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Adjusted Gross Income Assessment

Inclusions, Exclusions, and Adjusted Gross Income Assessment

Introduction

Determining a taxpayer’s taxable income is a complex process. A tax paper is required to deduct specific deductions from their gross income to determine the adjusted gross income (AGI). The adjusted gross income thus determined is then deducted allowances for personal exemptions and deductions that have been itemized to arrive at the taxable income for the period (Salisbury, 2016).

A person’s gross income includes one, some or all income earned from business, rental properties, interest, dividends, wages and alimony payments received from a former spouse, capital gains from assets owned and income earned from self-employment among others .  Tax payers are permitted by the United States of America Congress to make certain deductions from their gross income to determine their adjusted gross income (AGI).  The specific deductions have been identified in Form 1040 issued by the Internal Revenue Service (IRA) (Klemens, 2006).

Adjusted gross Income (AGI) Legislation

The US Congress has permitted various deductions from a taxpayer’s gross income to determine the adjusted gross income (AGI) in a bid to make taxation fair and equitable throughout the country. These deductions are referred to as “adjustments to income” or “above-the –line deductions” and are subject to change every year by the US Congress.

If trade or business carried out by a company does not constitute performance by a taxpayer as an employee, the Internal Revenue Service allows above-the-line-deductions for related expenses that are ordinary and necessary(Salisbury, 2016). These include allowance for salaries for personal services rendered to the company, travelling expenses while looking for new business and rental payments made by a taxpayer for a property for which he has not taken a title or has no equity and is done for purposes of ensuring that the business continued operating (Klemens, 2006). 

One of the deductions that have been allowed is educator expenses. Educator expenses is one of the adjustments to income also known as “above-the-line deduction” allowable by the Internal Revenue Service for purposes of computing a taxpayer’s adjustable gross income (AGI) for tax purposes (Salisbury, 2016).

Educational expenses are expenses incurred by eligible educators for participation in professional development courses and materials used in a class room such as computer equipment both hardware and software, books, supplies and other supplemental materials for use in a class room setting. Grade 12 teachers, instructors, counsellors, principals and their aides are some of the professionals classified as educators for tax purposes.

The next above –the –line deductions for determining a taxpayer’s AGI is contributions made to a traditional individual retirement account (IRA). Tax payers do not have to pay tax on IRA accounts because they are tax-deferred. Interest or any other gain made from such accounts is exempt from tax purposes (Salisbury, 2016).

The next item allowable for above-the –line deduction is interest paid on loans taken by students. The next above-the – line deduction are costs incurred by a tax payer to move to take a new job in a different location. This is allowable only if the move from the previous job is more than 50 miles away.

The next above-the-line deduction is alimony payments to a former spouse. Alimony payments are only allowable when they are made under a divorce or separation instructed pursuant to a court judgement (Chodorow, 2011).  The recipient of the alimony payment is required to include the amount in their income for tax purposes. Other above-the-line deductions include business expenses incurred by teachers, fee-basis government officials, performing artists and reservists, deductions made on health savings accounts, one half of tax on self-employment, domestic production activities deductions and jury duty pay that is paid to the employer of the juror among others (Ruff, 2007). Adjusted Gross Income.

Justification for the exemptions to taxpayers by the US Congress

There are various reasons which could have informed the decision by the US Congress to grant these exemptions to taxpayers.  The first reason is that the US Congress ensured that there is equity and fairness in tax payments to the Internal Revenue Service. Exemption on alimony payment protects the recipient from having to pay taxes twice on the same income (Salisbury, 2016).

This is because the recipient is taxed on the amount received as alimony income and so if the payer is also taxed then that would be tantamount to double taxation on the same income. The US Congress by granting the exemptions ensured taxes are broad based as to include as many people as possible. This was aimed at ensuring the government generates adequate revenues to meet its financial obligations.  The exemptions were also aimed at minimising tax burden on the individual tax payer (Reichert, 2016).

By exempting one half of tax on self-employment, the US Congress ensured that self-employed people are not overtaxed sine their employed counterparts get part of their tax revenues met by their employers. By granting the exemptions, the Congress ensured taxes are enforced in a manner that facilitates voluntary compliance by a wide range of taxpayers.

The exemptions are meant to communicate the message that the government is fair in its tax collection and that no one is unfairly treated in tax payment (Koch, 2011). This encourages tax payers to pay taxes willingly without compulsion or coercion from the tax authorities.  The exemptions were also made to ensure tax collection was efficient and hence achieved its overall objectives.

The exemptions was aimed at minimizing the cost of tax collection as the exemptions are easy to understand and apply in determining the adjustable gross income. The exemptions were also aimed at ensuring equity in tax application such that no particular citizen or group of citizens could perceive themselves as bearing an unequal burden of paying taxes as compared to other groups of citizens in the USA (Chodorow, 2011).

 The US Congress was also motivated by the desire to ensure taxes were administered in a neutral manner. The exemptions were meant to ensure that no race, group or sector was favoured by taxes over another and that no group, sector or race could use taxes as the basis for collective or individual decision making in either investment, social life or any other matter. 

The exemptions were also aimed at ensuring taxes were predictable and inevitable to ensure tax payers have information before hand to enable they pay taxes on time and without coercion from the Internal Revenue Service (Klemens, 2006).  The Exemptions could also have been undertaken with the aim of achieving certain objectives.  For instances, exempting interest on student loans could have been motivated by the aim of encouraging young people to pursue higher education without the fear of incurring huge debts by the time they finish their studies.  

Educational expenses exemption on eligible educators for participation in professional development courses and purchase of materials used in class rooms such as computer equipment both hardware and software, books, supplies and other supplemental materials could have been motivated by the desire to grow investment in education. By giving exemptions for educator expenses, the congress encouraged investment in schools and colleges to improve accessibility and quality of education in the sector (Klemens, 2006).

 The exemptions could have been motivated by a desire to ensure tax administration was simple foe every tax payer to understand. Adjusted gross income to be considered. This encouraged compliance and improved willingness of taxpayers to pay taxes on time and reduce tax evasion.  The exemptions were also aimed at fostering fair and equitable distribution of wealth in the country. By ensuring no tax payer was billed for more than their fair share of taxes, the congress ensured that people retained their fair share of gross income. This ensured income will be distributed equitably with the country (Klemens, 2006).

Additional exemptions that can be challenged easily

Even though the US Congress has granted various exemptions, there are various exemptions that can easily be challenged. One of the exemptions that can be challenged is exemptions on educator expenses. Educator expenses that can be challenged include participation in professional development courses, books, supplies and supplemental materials. Schools, colleges and universities charge students fees at market rates and even where they are given grants and donations, they are given on budgets which have been prepared beforehand.

By granting exemptions, the congress is favoring one sector over others. This is because these expenses are factored in the financial statements of the schools they work for. Most educational institutions that employ educators are also for profit making and hence giving exemptions will only increase their revenues (Chodorow, 2011).  

On the other hand, costs that educators incur on attending personal development courses are ideally aimed at enhancing their knowledge, skills and competencies. The educators henceforth are able to assume bigger responsibilities and earn higher incomes. By exempting educator fees, the revenue service is ideally granting educators in one profession better terms that their counterparts in other sectors.

Exemptions in alimony payment to a former spouse is another exemptions that can be challenged (KATZEFF, 2011). This is mainly because alimony payments occur as a consequence of breakup of the family unit. This exemption encourages couples to break up to earn alimony income from a former spouse. It common in the country to find one spouse earning alimony income from multiple former spouses. This is likely to lead to laziness as many people will opt for his revenue source instead of working hard to generate their own income. This exemption encourages families to break up and take their marriages to court to have the divorces registered for alimony payment (KATZEFF, 2011).

Exemptions on interest on student loans is also another ill-advised exemption.  Exempting interest on student loans ignores the effect of passage of time on the value of money. Money lend to students loses value due to passage of time due to inflation and other factors. The interest is supposed to compensate for the effects of inflation on the time value of money. Giving exemptions to performing artists is unfair as what they earn inform of income is similar to what other professional also earn from their professions (Koch, 2011).

Additional exemptions that are agreeable

There are various additional exemptions that US Congress has granted that are agreeable. One of the more agreeable exemptions is deductions on medical and dental expenses more than 7.5% of a taxpayer’s adjusted gross income. This expenditure is agreeable because it promotes the health of tax payers and it is classified as below-the –line deduction.

Health saving account deductions are agreeable because the funds saved will improve accessibility of healthcare services to all Americans and especially the most vulnerable members. Moving expenses are agreeable because they reduce the living standard of the tax payer at the time of moving without increasing their disposable income. This exemption is therefore agreeable (KATZEFF, 2011).

 Deductible part of self-employment income is agreeable because this exemption goes a long way in promoting entrepreneurship in the country. With the rising numbers of unemployed people who are employable, any efforts to promote self-employment would assist in reversing unemployment in the country.  The exemption on penalty for early withdrawal of savings is also an agreeable deduction. This is mainly because the penalty levied is punitive to the taxpayer and taxing him again would be being unfair on the part of the internal revenue service (Chodorow, 2011).

References

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