Selecting Tax Returns for Examination - Essay Example

HOW ARE TAX RETURNS SELECTED FOR EXAMINATION HOW ARE TAX RETURNS SELECTED FOR EXAMINATION Selecting tax returns for examination involves various steps including setting decisions. Decisions to pay tax are determined mainly by politics figures that need the tax money to be contributed so that various programs they hope to accomplish are completed. Decisions that are made on tax expenditures and entitlement programs are likely to affect the citizens in either a positive or a negative manner. Political figures such as senates overturn rules that limit the legislation that can be imposed on appropriations bills that make it difficult to generate money for programs hence in the long run tax rates are increased on citizens making them have to part with a huge part of their salaries. Introduction Power rifts that exist between the legislative and executive branches of government on who is to make decisions also affects citizen, a lot of time is wasted of formulating budgets and it makes it even worse that incase of any changes that are made, long bureaucratic lines have to be made to ensure that the right authority is given. This rift has proven to cause the citizens negatively since as the branches take time to process their budgetary terms, the citizens continue paying the taxes and taking a longer time to get entitlement programs. As citizens, they are entitled to getting grants, loans, operating and capital budgets, but this becomes either easy or hard depending on the process it takes for approval and which program one is applying for. Entitlement programs are given on the basis of how many people or organizations actually meet the requirements of getting the programs. This also is dependant on he government that the person or organization is under since the state and local governments budget on a separately for operating expenses and budgets (S.Rubin). Decisions made that make the budgeting process vary from one state to another easily affects the citizens. Most citizens are likely to live in one state and work in another or be in a situation where their families live in a different state from the one their working in. A good example as explained in the chapter in the difference in budget processes between the state of Texas and Georgia where in Texas the legislative budget board and the governor works together in the budget planning process. Here citizens have to ensure that their application comply with standards of the board and the governor. In Georgia however the process is made easier for the citizens since the legislative institutions have no role in discussing the budget process. With this example it is clear that the citizens are affected by the decisions that come with the rules that govern each state. All the factors discussed above is likely to affect citizens on conditions that they likely to save their money in scenarios that political bodies actually assist in that but in many a times, the citizens suffer since the decisions made by these political bodies often make it difficult since long bureaucratic lines have to be made. It is important that the problems that the citizens are faced with are brought to book and dealt with since they are the most important people that a given country can have. The overall decision however lies with the citizens to ensure that as amendments are made they target areas that they face difficulties since at the end of the day they will be the ones to pay for the taxes and want to get entitlement programs. Stated by the International Monetary Fund, 2006 the national income accounts are product accounts that are produced in the United States by the Bureau of Economic Analysis of the Department of Commerce and used to generate data of general economic activities such as the Gross Domestic Product. They are one of the main sources of data on general economic activity in the United States. Statistic collection should be done carefully to ensure that the correct information is given. Using the double entry accounting system to report the monetary value it comes with limitations that can affect the standards of living, they include measurement errors, misrepresented subcategories and unmeasured welfare. Measuring the Gross Domestic Product does not include activities not seen as illegal or underground activities because it is very difficult to determine the measure of these underground activities. This could affect the gross domestic product by giving inaccurate figures either too high or too low. Another factor that contributes to errors in measurement include inflation which fluctuates and difficult to determine accurately. Categories that should be included not appearing or should be appearing in government consumption are usually misrepresented and usually plays a big part in the determination of GDP; this could easily affect the decisions that will be made thereafter. Measurement of gross domestic product only considers the activity of the market but does not count welfare an economy’s market activity could be on the rise but this does not mean that the welfare will be on the rise. These factors affect the standards of living in that they don’t get the best cost of values since the economy is run on estimates. Now before the investor begins investing from either of these two companies, there are basic questions, which he ought to ask himself. These questions regards to the financial analysis which he is to have a report well outlined about the two companies. This information of the financial analysis will show the asses of stability, liquidity, profitability and solvency (Marshall, 2010). This is the sources of finances in both companies. Stability is the ability of any company to remain in the business for a long period of time. Again it is the capability of a company to sustain the losses which are significant in the conduct of its business. Tax selection has to assess’ stability of these two companies and this will require him to use the income statement and also the balance sheet, financial as well as non financial indicators of the companies (Singh, 2004). Pertaining the liquidity, this is the capability of the company to maintain the cash flow while satisfying immediate obligations. Tax selection has to look whether the companies his seeking to invest has good cash flow or is stagnant. Cash flow refers to the movement of the money into and out of the business. This cash flow is usually measured after duration of time which is fixed. In fact, cash flow measurement can be used to for computing other parameters that are to give the value and situation information of a company. Cash flow also will help the investor also to determine the problem of the company’s liquidity. Actually, it does not mean that when a company is profitable it can be termed as liquid because a company can fail due to cash shortage even when it is profitable (Marshall, 2010). Profitability assures continued organization growth. Profitability degree is usually based in the company’s income statement, which reports the company’s results of operations. It will be mandatory for the managers to analyze the income statement of companies before beginning to invest in either of the companies. Income statement also referred as the profit and loss statement, P&L, or statement of financial performance of the company’s financial statement showing how the money received from the product as well as services before the subtraction of expenses (‘top line’), is considerably transformed into net income, which is the result of the after all the revenues, as well as expenses, have been taken into consideration, also termed as the ‘bottom line’. However, the Income Statement indicates the recognized revenue for a certain/given period of time, the cost and the expenses that are charged for these revenues, the depreciation as well as amortization of particular assets and finally the taxes. The reason for having an Income Statement is simply to show the investors and the managers whether the company made a profit or a loss during the period that is being reported. Looking at the profitability of tcompanies, we see they are different. According to the report, the Return on the equity (ROE) is highly accepted yardstick for measuring the successes of a given company. Return on equity is used to determine the return rate on the ownership interest, in other words, the shareholder’s equity of the common stock owners. ROE also measures the firm’s efficiency at generating the profit from every unit of the shareholder’s equity also referred to as the net assets or in other words, the assets minus the liabilities. Moreover, Return on equity is regarded as the net income amount that is returned as a calculated percentage of the shareholder equity. Consequently, ROE will give the investor the information he requires about how well the company is using the investment funds in generating the earnings growth. Again ROE comes in handy especially when a comparison of the company’s profitability to other similar firms is done. ROE is also known as the ‘Return on net worth’ (RONW). .The Return on the owner equity is realized after following the formulae indicted below. Nevertheless, ROE between 0 % to 20% is regarded as enviable (Atrill & Mc Laney, 2011). The summary analysis tabled will be of essence in offering a brief but complete explanation to what it takes to be involved in debt management. It is apparent that Red Cross is the favorable company to invest in since; it is a nonprofit making organization. Nevertheless, the chart shows that the Quick Ratio for Company has been increasing between the year 2002 to 2004 to 14 and in the year 2005 it dropped to 18 whereas Tesco Company had a high Ratio in 2001 with 19 but in the year 2002, it dropped to 3.5. In the year 2003 the Quick Ratio for Tesco Company increases dramatically but subsequently started dropping 3.4. However, for Tesco Company in 2003 there is a decrease in the ratio till 2005 which means that the company could indicate that the company lacks liquidity in the form of assets to cater for small debts. On the other hand, Red Cross Company has seen a strong growth of Quick Ratio for the year 2001 to 2004. This is a clear indication that Red Cross as a company is using its assets accordingly. However, in 2005 Red Cross Company has a low return on its capital with a decrease of up to 2.62%. Another aspect that the investor has to keep in mind is the Net Profit Margin. Net profits x 100 = net profit margin Net sales This net profit margin is calculated monthly or quarterly or in duration of one year. Net profit margins however could be used to measure the overall success of a company or a business or a farm. Consequently, the higher the net profit margin will show that the business is pricing its products in a manner that indicates good cost control. It can be termed worthwhile for the company when it compares the results of the businesses within the same industry because they are all oriented in the same business environment and also customer based. Therefore, they have approximately cost structures that are similar. When the net profit margin is higher than 10%, it can be said to be brilliant. The Net Profit margin between the two companies, Tesco and also Red Cross, they both have different Profit Margin. Conclusion Tax selection in non profit and profit making companies is important in controlling the running of the organization. Solvency is another issue which should be considered in tax selection of a certain company or firm. When talking about solvency, we consider it an ability of the business to sustain itself in the sense that the liabilities are strong enough to stand in for the assets. We have to consider however that solvency, though usually mistaken with liquidity are not one and the same thing in this or another case. Solvency has to be measured in terms of ratio. Let’s say the total of the current assets available in the company has to be divided by the total of the current liabilities. That is to say solvency therefore is calculated in terms of the present (current) ratio. For the business to be strong enough and hence capable of fully covering the liabilities, the current assets should always be double the current liabilities that is a fraction of 2/1. This shows that, in a business, selling assets to obtain cash may always lead to losses; therefore, more assets should be available in order to safe guard from such risks arising. Compared to solvency, liquidity can be said to be” when a business has more cash it categorically follows that it has a high state of liquidity. Liquidity therefore has to do with cash. When a business is capable of turning the available assets into cash, we can consider this to be liquidity as well. So as we talk about this, we can consider liquid assets. These are those assets that can easily be turned into cash in the business without the fear of engaging into a big loss or the value getting diminished. Some examples of the liquidity we can always think about are those accounts received and even the deposits in the bank, which include certificates (Murray, 2011). Sometimes, liquidity has been confused with the concept of solvency, but as a matter of fact they are not the same. References Curtis, J.S. (1998). Frictional unemployment and the role of industrial diversity. The Quarterly Journal of economics Cambridge, Massachusetts (USA): the MIT Press Goldstein, R. and Turner, P., (2004). Controlling Currency Mismatches in Emerging Economies. Institute for International Economics, Washington, D.C. International Monetary Fund, (2006). Assessing Global Financial Risks, Global Financial Report,p. 1-44. Read More