This stands in sharp contrast to the early view of Miller and Modigliani (1958), who argued that in a well-functioning efficient market without taxes, informational asymmetries, and default costs no financial synergy can be found because the market value of company does not depend on its capital structure. However, a firm’s capital structure decision can matter if these assumptions are not true. The theory has two important caveats concerning its applicability; first, one of the merging firms must be experiencing financial distress. The theory is most directly applicable to marginally profitable start-up companies and existing companies that are financially distressed. Second, theory only applies when severe agency problems exist between the manager and the claim holders of the distressed firm.
Accounting fraud can be described as some sort of earnings management but not all earnings management can be considered fraudulent. The distinguishing criteria of ethical accounting practices from unethical ones are use of accounting standards, transparency, and intent. If the intention is to misrepresent and mislead users of financial reports, it is most likely that accounting practices employed do not conform to accounting standards and unfavorable information vital to investors are withheld. On the other hand, ethical earnings management is done in a transparent manner and vital information are disclosed accordingly. 3.
In identifying the true contribution of the incremental cash flow, several factors must be considered. First, the costs of launching and continuing to operate the project are weighed against any income that the project generates. Assuming that the initial return is greater than the costs of launching and operating the project, a state of positive incremental cash flow exists. This is the ultimate goal for the business, since it serves as a strong indicator that the project is a viable source of revenue and has the potential to be integrated into the basic operations of the company. The cash flow statement should not include interest expense or dividends.
The reason is the information support by independent documentary evidence. Historical cost accounting figures are based on actual acquisition prices, not merely possible of market values that can be revised to affect the ratio analysis which improve the performance of financial results. That is, historical costs accounting provides an objective view of an entity’s performance. Thus it consider verifiable and reduces the risk of manipulation of figures by management. In contrast, if there is not active market, market value accounting requires the use of estimation subject to uncertain assumptions, personal judgment, and subjective information about future values, such as discount rates and allowance for doubtful accounts.
The basic answer is that share repurchases are great when the share price is undervalued, and not-so-great when the share price is overvalued. To put it into a more useful context, if you would otherwise reinvest your dividends or invest new capital into the company at current stock prices, then share repurchases are useful to you because the company basically does it for you. The alternative is that the company could pay you a higher dividend, but you’d be taxed on that dividend and reinvest it into the company anyway. On the other hand, if you would not reinvest dividends or invest new capital into the company at current prices, then share repurchases are not in alignment with your current outlook, and it would be better for you to receive a higher dividend. Something else to be considered is that when a company uses money for share repurchases when it could be paying a higher dividend instead, the company’s management is limiting your control and increasing theirs.
Service providers, when classified as agents, are able to report trading and brokerage fees as revenue, although not for the full value of the transaction. Although trading firms such as Goldman Sachs and Merrill Lynch used the conventional "agent model" for reporting revenue (where only the trading or brokerage fee would be reported as revenue), Enron instead elected to report the entire value of each of its trades as revenue. This "merchant model" approach was considered much more aggressive in the accounting interpretation than the agent model. Enron's method of reporting inflated trading revenue was later adopted by other companies in the energy trading industry in an attempt to stay competitive with the company's large increase in revenue. Between year 1996 to 2000, Enron's revenues increased by more than 750%, rising from $13.3 billion in 1996 to $100.8 billion in 2000.
Rolls-Royce numbers are 16.81% and 83.19 % respectively. In both cases we see that firms prefer to use their own capital. We cannot tell with certainty why this structure was chosen, but we can look for example at the level of liquidity. Unilever has 93% (cash to current liabilities). We can conclude that the firm has enough cash to meet its obligations and able to generate cash flow to use it for project financing when needed.
This method converts net income to net cash from operating activities. When using the indirect method a company must convert net income to net cash by gathering net income and adding or subtracting adjustments, this would give the company the Net cash, without having to go thru detail transactions. . Even though the indirect method may be easier for a company to manage their cash flow, I believe that this method may bring more work in case of an audit. (Weygandt, Kimmel, & Kieso, 2010. p 618).
Taxpayer requested a letter ruling on whether or not the discounts received constitute as constructive dividends received. The IRS indeed ruled the discounts received by the taxpayer constituted as constructive dividends under section 316 and the distribution applied to section 301. A constructive dividend is a form of payment made by a corporation to its shareholders that resulted in any measurable economic benefits to the shareholder. It can either be a direct or an indirect form of payment and mostly occurs in closely held corporations. These payments can also be distributed both advertently and inadvertently.
As a business owner I would use accrual method only because it recognizes Receivables and payable. When using the cash basis a company can appear that it is earning profit when in fact it is loosing funds. Cash basis does not acknowledge money that is owed which make is very difficult to keep accurate records. The IRS generally requires companies to use the cash accrual basis of accounting on their tax return. The Internal revenue service does allow the cash method of accounting if certain criteria are met because tax laws change frequently it is essential to contact a CPA if a business owner decides to use cash basis of accounting.