Financial Statement objectives

This`post represent the first in a series of posts that will focus on financial statement analysis. The topics will cover the various areas of financial analysis such as current liquidity, capital structure, funds flow and profit and loss analysis.

Financial statement analysis is the process of applying various analytical tools and techniques to the financial statements of an organization. The purpose of this analysis is to determine significant relationships from business transactions that are not necessarily apparent in the financial statements.

Financial analysis can be used as a preliminary screening tool in the selection of merger candidates. It can be used as a forecasting tool of future results by individual and institutional investors. It can also used as an evaluation tool by corporate management. A key element of financial analysis is to eliminate the reliance on guesswork, hunches or intuition in the decision making process.

In order to understand financial statement analysis, we must first examine the analytical objectives of some of the users of financial statements such as creditors, equity investors, management, auditors and merger analysts.

Creditors are providers of either short term or long term financing to an organization. Trade creditors are providers of very short term credit for the purchase of goods or services and usually expect to be paid within 30 to 90 days. Banks can be thought of the more traditional lenders of short term an long term financing. Another method of credit financing is through the sale of corporate bonds in the securities market. Creditor used financial analysis to asses the existence and reliability of resources to ensure the repayment of principal and interest on loans,

Equity investors are providers of capital to an organization. Since equity investors represent owners in the enterprise equity capital is exposed to all the risks of ownership and provides a cushion to the loan capital that is senior to it. Equity capital or residual interest is what remains after the claims of creditors, bondholders and preferred stockholders have been satisfied during the liquidation process. Therefore, the financial data needs of equity investors are the most comprehensive because their investment is affected by all aspects of the enterprise such as operations, profitability, financial condition, and capital structure.

The objectives of management in financial statement analysis is to asses the organization's financial condition, profitability, and cash flow. management has a number of methods, tools and techniques available to it in monitoring and keeping up with the ever changing business environment.

The objectives of acquisition and merger analysts are in many ways similar to those of the equity investor except that the analysis of the enterprise focuses primarily on the acquisition of an enterprise. Acquisition analysis will stress the valuation of assets including intangible assets such as goodwill, and the liabilities included in the acquisition or merger plan.

Homeowner Energy Tax Credits

Homeowners still have time this year to make energy-saving and green-energy home improvements and qualify for either of two home energy credits.

The Nonbusiness Energy Property Credit is aimed at homeowners installing energy efficient improvements such as insulation, new windows and furnaces. The credit is more limited than in the past years, but can still provide substantial tax savings.

The 2011 credit rate is 10 percent of the cost of qualified energy efficiency improvements. Energy efficiency improvements include adding insulation, energy-efficient exterior windows and doors and certain roofs. The cost of installing these items does not count.

The credit can also be claimed for the cost of residential energy property, including labor costs for installation. Residential energy property includes certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass fuel.

The credit has a lifetime limit of $500, of which only $200 may be used for windows. If the total of nonbusiness energy property credits taken in prior years since 2005 is more than $500, the credit may not be claimed in 2011.

Qualifying improvements must be placed into service to the taxpayer’s principal residence located in the United States before January 1, 2012.
Homeowners going green should also check out the Residential Energy Efficient Property Credit, designed to spur investment in alternative energy equipment.

The credit equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property.

No cap exists on the amount of credit available except for fuel cell property.

Generally, labor costs are included when figuring this credit.
Not all energy-efficient improvements qualify for these tax credits, so homeowners should check the manufacturer’s tax credit certification statement before they purchase. Taxpayers can normally rely on this certification statement which can usually be found on the manufacturer’s website or with the product packaging.

Eligible homeowners can claim both of these credits on Form 5695, Residential Energy Credits when they file their 2011 federal income tax return. Because these are credits and not deductions, they reduce the amount of tax owed dollar for dollar. An eligible taxpayer can claim these credits regardless of whether he or she itemizes deductions on Schedule A.

Thanksgiving Time
by Langston Hughes (1921)

When the night winds whistle through the trees and blow the crisp brown leaves a-crackling down,
When the autumn moon is big and yellow-orange and round,
When old Jack Frost is sparkling on the ground,
It’s Thanksgiving Time!

When the pantry jars are full of mince-meat and the shelves are laden with sweet spices for a cake,
When the butcher man sends up a turkey nice and fat to bake,
When the stores are crammed with everything ingenious cooks can make,
It’s Thanksgiving Time!

When the gales of coming winter outside your window howl,
When the air is sharp and cheery so it drives away your scowl,
When one’s appetite craves turkey and will have no other fowl,
It’s Thanksgiving Time!

Online Sales Tax

A bill creating the first national legislation for states to collect online sales tax will become law next year according to Senator Richard Durbin. Sentor Durbin, who is co-sponsoring the bill with nine other senators from both parties, said he wants to hold a Senate committee hearing, possibly before Christmas on the measure. Senator Lamar Alexander, who is also a co-sponsor of the bill, has been trying for years to overturn the court decision legislatively. He predicted that the bill would pass Congress because it is a bipartisan endeavor and is more flexible than previous efforts. The bill is similar to legislation introduced last month in the House.

The bill, called the Marketplace Fairness Act, would enable state and local governments to collect an estimated $23 billion in tax revenue each year for online, catalog and other so-called remote sales.

Currently, if an online retailer has a physical presence in a particular state, such as a store, business office, or warehouse, it must collect sales tax from customers in that state. If a business does not have a physical presence in a state, it is not required to collect sales tax for sales in that state. This rule is derived from a 1992 Supreme Court decision, Quill v North Dakota, which held that mail-order merchants did not need to collect sales taxes for sales into states where they did not have a physical presence.

Consumers who live in a state that collects sales tax are technically required to pay the tax to the state even when an Internet retailer doesn't collect it. When consumers are required to pay tax directly to the state, it is referred to as "use" tax rather than sales tax.

The only difference between sales and use tax is which person -- the seller or the buyer -- pays the state. Theoretically, use taxes are just a backup plan to make sure that the state collects revenue on every taxable item that is purchased within its borders. But because collecting use tax on smaller purchases is so much trouble, states have traditionally attempted to collect a use tax only on big-ticket items that require licenses, such as cars and boats.

The severe economic problems of many state and local governments have forced many state legislators to develop new methods of raising revenue without raising personal, business or real estate taxes. As a result, online sale tax seems to be viewed as a source of untapped revenue.

But as online retailing has grown over the last decade, states have been trying to solve the problem on their own by expanding the definition of physical presence to include third-party affiliates, typically in-state websites that earn commissions by providing links to Amazon and other out-of-state retailers

Amazon, which has fought such efforts in other states such as Hawaii, Rhode Island, North Carolina, and many other states has agreed to begin collecting sales tax in Septenber 2012 as a a compromise with Califirnia. The compromise Amazon struck with California was that California’s tax would take effect on September 15, 2012 only if the federal government does not pass a federal online tax measure.

Ebay which opposes the Market Fairness Act has stated "this is another Internet sales tax bill that fails to protect small business retailers using the Internet and will unbalance the playing field between giant retailers and small business competitors. It does not make sense to expand Internet sales tax burdens on small businesses at a time when we want entrepreneurs to create jobs and economic activity.”