The loss ratio (or claims ratio) should always be less than 100 in order for an insurance company to make a profit; this means that premiums earned are sufficient to cover losses incurred on a particular line. The second way that these funds are used is to pay expenses incurred in the selling and providing of insurance protection. Some examples would be loss adjustment expenses, commissions, and other expenses. The underwriting gain or loss can be calculated by subtracting claims and expenses incurred from net premiums written. The combined ratio is a common measure of the overall underwriting profitability.
EUT Model To use the advanced of the model of Allingham and Sandmo 1972, taxpayer's behavior is consistent with the axioms of von Neumann-Morgenstern utility function and is solely dependent on disposable income. The taxpayer is assumed to be risk-averse thus this function has a positive marginal utility and strictly decreasing. The model of Allingham and Sandmo 1972 is given by: (1) With: and While:
Generally accepted accounting principles prescribe the accrual basis of accounting over the cash basis of accounting. The accrual basis of accounting measures the performance of a business by showing in detail every transaction regardless of when the funds are received. Cash basis of accounting only accredits earnings and expenses when money is really being paid out or received. The cash basis of accounting is a less expensive way of keeping records but the failure of using this method is that financing is very difficult because of inaccuracy. The big difference between accrual and cash basis of accounting is when one uses cash basis entries are recorded at the time payment is received.
There are certain criteria to consider when deciding which method of accounting should be used for a business. The accrual method must be used if a business has sales of more than five million annually, or if they stock an inventory of items that when sold to the public creates gross receipts over one million per year. Although a business is entitled to decide which method best suits their needs, due to certain guidelines there are times accrual basis accounting is the only option. Regardless of the method selected there are benefits to both options for a business. The benefits of accrual basis accounting include equal distribution of expenses paid in advance and in arrears.
Taxes can be proportional, regressive or progressive in nature. This means that different taxes place different burdens on the rich and the poor. A proportional tax is on in which the proportion of income paid in tax is constant at all income levels. A low-income household pays the same percentage in tax as a higher-income household. The rich will pay more than the poor in absolute terms, but the burden of the tax will be no greater on the rich than it is on the poor.
This can make the financial statements misleading. Both methods are way of recording transactions the only difference is when the number hits a company’s bottom line. An account may use the cash basis accounting when the company’s is small and the books are kept on the actual flow of cash coming in and out. This is used normally with a company with no inventory or a sole proprietor. They typically use this method because it requires fewer journal entries for closing an accounting period and creating financial statements.
Partnership agreements define the ways that any profits and losses are shared between partners. Advantages and disadvantages are similar to those of a proprietorship. The major advantage of a partnership is its low cost and ease of formation. With regards to liabilities, partners can potentially lose all their personal assets, including those not invested in the business, because under partnership law, each partner is liable for the business’s debts. Corporations are legal entities created under state law and are separate and
The benefits of automatic deductions is the employee does not need to worry about how much to deduct from each paycheck and not have to figure out how much money was pre-tax money when they file their taxes (Guy). The 401(k) plan has many benefits the employee can use and take advantage of. The 401(k) plan allows an employee to rollover, transfer the funds if the employee leaves the company for another position and can either move the old 401(k) funds into the new 401(k) plan or roll it over to an individual retirement account (401(k) Plans). If something
The cost of capital is rate of return required by a capital provider in exchange foregoing an investment in another project, assets or business with similar risk. For that reason, it is also known as an opportunity cost. For investors, the rate return on a security is a benefit of investing. But for financial managers, the same rate of return is a cost of raising fund that is needed to operate the firm. In other words, the cost of raising fund is the firm’s cost of capital.
Ignoring taxes, the correct opportunity cost for this machine in capital budgeting decisions is: A. $75,000 B. $25,000 C. $20,000 D. $5,000 4. What is the amount of the operating cash flow for a firm with $500,000 profit before tax, $100,000 depreciation expense, and a 35% marginal tax rate? A.