Finance and Accounting: Purpose of Taxation and Types of Borrowings - Assignment Example

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FINANCE AND ACCOUNTING ASSIGNMENT

Question 1

Purpose of taxation

The main purpose of taxation is to raise revenues for income, and services support needed in the society. In other words, taxes finance the expenses incurred by government when managing the economy. These expenses can be, but not limited to education, healthcare, operating government business entities, and garbage collection. Government also uses taxation for purposes like;

• To lessen pollution. This is achieved by taxing offending companies
• To dispirit corrupt lifestyle such as tax on beers and cigarettes
• To safeguard infant and local industries by taxing imports
• To realize better parity of affluence and revenue. Income from taxation is used to assist the very unfortunate such as offering food stamps.
• To advance the balance of payments (BOP) by snowballing the duties charged on smuggled goods.
• To regulate expenditure in an economy therefore reducing inflation

Nonetheless, it is argued any government which cannot tax cannot survive. Similarly, taxation can have a redistributive function, intended to drop the uneven dispersal of income and wealth that outcomes from the standard operation of a market-based economy. This purpose of taxation has been passionately disputed over time, and diverse models of distributive impartiality can be castoff to confirm or repudiate its legality. Taxation as well has a controlling constituent. This function is used to direct private sector activity in the direction looked-for by government

Meaning of permanent establishment as per Oman tax law

Permanent establishment (PE) under Oman tax law is demarcated as “a fixed place of business through which a business is wholly or partly carried out in Oman by a foreign person” (PWC 2015, P. 7). This comprises places for management, factories, branches, places of sales, quarries, mines, workshops, assembly projects, areas of production, or building sites. Despite, the use of display or storage facilities, collection of information for the business or acquisitions of goods, conservation of a stock of goods, and/or other activities of supplementary nature or introductory are not supposed to create a Permanent Establishment in Oman. According to PWC (2015, p. 7), the meaning of permanent establishment in Oman tax law as well references to conducting business in Oman through a hooked on agent or unswervingly. For all foreign organizations rendering consultation at Oman, a 90 day inception in a 12 months period smears, whether via personnel or nonstop or others nominated to conduct the services.Tax agreements amid Oman and its agreement associates might in some circumstances change the permanent establishment purpose ensuing under domestic law.

Question 2

Cash management is a comprehensive term that denotes to the concentration, collection, and disbursement of cash. The main aim of cash management is to manage the cash balances of an organizations in a manner to make the most of the accessibility of cash not capitalized in fixed assets or inventories and to do so in such a manner as to circumvent the risk of liquidation. Management of cash balances, organizations level of liquidity, and immediate investment strategies are some of the factors monitored as part of cash management. The risk at which a company is exposed is lessened and its profitability improved by cash management.

Cash is one of the essential facet of any business organizations, therefore, proper management of the cash by having a finest cash balance plays a significant role in the direction of the profitability and liquidity of any concern (Bose and Siddiqui 2015, p. 15). Always, a business concern should maintain adequate cash for meeting its obligations. Maintaining a sound cash balance is the fundamental aspect of cash management. Correspondingly, avoiding the situation of insufficient or disproportionate and maintaining ideal level of cash after attaining the liquidity and profitability so as to make the most of the value of stakeholders as a whole is the objective of cash management. Effective cash management methods are pre-requisites to implement payments, collect receivables and control liquidity.

Question 3

Types of borrowings

There are very many ways of borrowing money. This include, but not limited to;

• Unsecured loans

This type of loan is not secured against anything. In other words, if the person obtaining the loan does not pay, the bank cannot confiscate any goods but can take that person to court. Nonetheless, the interest rates on this type of loan are quite high.

• Personal loan

Personal loans are secured or unsecured. Secured personal loans allows the borrower to borrow more money in the future because the security is often the borrower’s house. However, for unsecured loans, the lender provides a variable interest rate. Personal loans are often used to consolidate debts

• Payday loans

These loans have very high interest rates, and the payment loan period is very short, making them quite expensive.

• Logbook loans

These are loans secured against a person’s car. After obtaining this loan, the lender owns the person’s vehicle under a bill of sale until the borrower pays the original amount and the agreed interest.

• Mortgage loan

This is a loan obtained to purchase a house. This loan is usually secured by a borrower’s home. The lender can foreclose the borrower’s home if the borrower fails to make the monthly payments as agreed. The amount a borrower seeking mortgage loan can get is determined by the borrower’s home value minus any unpaid or liens mortgage (s). There are two types of mortgages – repayment mortgage (the first amount the borrower pays back goes towards the initial amount the borrower borrowed plus the interest), and interest only mortgage (the repayment the borrower makes goes towards the interest only).

Question 4

Types of insurances and need of such insurances

• Health insurance

This type of insurance covers financial losses resulting from illness, injury, and disability. The main aim of this insurance is to offer coverage for routine or emergency medical expenses. With healthcare costs becoming quite expensive, it is becoming quite hard for average people to afford. Extreme medical expenses could probably wipe someone savings (Oklahoma State Department of Education 2008, p. 3). Thus, health insurance helps people protect themselves from this risks. This insurance can cover vision, dental, surgical, prescription, hospital, and other expenditures.

• Life insurance

This is an agreement between an insurer and policyholder stipulating the sum to be compensated to a beneficiary upon the insured’s death. Several studies have noted more than 70% of American adults have this type of insurance (Family Economics & Financial Education 2004, p. 2). The agreement is usually a policy which the states the sum to be remunerated to the beneficiary upon the insured person’s death. If the insured person dies, the recipient of any policy proceeds is referred to as beneficiary. There are three different types of life insurances;

• Term life insurance –this type of insurance offers coverage for a defined time period, usually 5, 10, or 20 years; pays cash benefits to a named beneficiary if the insured dies during the term of policy
• Universal life insurance – his type of insurance enables the policyholder to maintain their policy and still make modifications, like lessening the death benefit or changing the premiums.
• Whole life insurance –this type of insurance covers the insured for their whole life; benefits are paid to the beneficiaries when the policy holder dies.

Just like health insurance, life insurance if offered by employer as part of the benefit package

• Disability insurance

Insurance is accessible to avoid the risk of mislaying earnings because of a disability. Disability insurance substitutes a percentage of one’s earnings if they turn out to bein capable to work because of disease or wound (Oklahoma State Department of Education 2008, p. 4). The insurance characteristically recompenses amid 60% – 70% of one’s full time salary. It certainly not recompenses 100% of the salaries as there is no inducement to go back to work.

• Liability insurance

This type of insurance protects someone when others assert to be wounded or hurt as a consequence of somewhat you fixed or did not do. Usually, it recompenses therapeutic bills or offers reimbursement to anybody who can verify you were inattentive or performed inappropriately. Many states, comprising Oklahoma, need you to have liability insurance on your car in case you are intricate in a mishap. Injury or wounds instigated deliberately are not covered by liability insurance policies.

Question 5

Advantages of buying an asset

• Once finished with the equipment, you can sell it, in turn recovering some costs
• Buying an asset is much easier because you do not have to deal with contracts and agreements
• Once you purchase an asset, you have complete control over it because you are not limited by a leasing company’s asset.

Disadvantages of buying an asset

• With changing technology, you can be stuck with the equipment if it becomes outdated. For this reason, you have to make a decision to sell it, repair it, continue using it, or store it.
• All the maintenance costs of the asset fall on you since you are the owner. Depending on the challenges on the way, this can turn out to be quite costly, and making repairs can be challenging.
• It can be challenging to pay for costly asset at once. Extreme initial costs might keep you from purchasing exactly what you need.

Question 6

Rena cash flow statement

September 2016

October 2016

Budgeted (Oct 2016)

Variance

cash coming in

Sales paid

500

Interest received

1,000

Salary

2,600

2,700

2,500

100

Cash going out

Investment

600

Purchase

500

500

0

Rent

1,200

1,200

0

Cable

200

180

20

Clothing

110

110

110

0

Electricity and water bill

100

85

15

Car expenses

231

231

From this cash flow statement, the budget is stated a bit low compared to actual amounts of the expenses. Rena cash flow statement indicates there is increase in cash when comparing it with the budgeted one. As it can be seen, the cash shortfall is caused by Rena’s avoidance of budgeting high amounts.