by Jean Miller | Accounting News, Business Growth, Financial Statement Reporting, News
Business financial statements demonstrate the source of a company’s revenue, its assets and liabilities, how money was spent, and how the company manages cash flow. They also help managers, employees, investors, and lenders assess the company’s performance at the end of the fiscal year. Read on for the three core reports that fit together to make up a complete set of financial statements for your small business.
Income Statement: Demonstrates Business Profits and Costs
Typically, the first point of interest for an investor or analyst is your income statement (also known as the profit and loss statement). This report illustrates your business’s performance in revenue and expenses throughout each period. Your sales revenue should be displayed at the top, followed by the deduction of cost of goods sold (COGS) to find your gross profit. Note: COGS includes the cost of labor, materials, and overhead needed to manufacture a product. From there, additional line items of business expenses, including taxes, will affect your gross profit until you reach your net income at the bottom, i.e., your “bottom line”.
Balance Sheet: Demonstrates Financial Position of a Business
This report gives an account of the business’s financial health by displaying assets, liabilities, and owners’ equity at a particular point in time. It helps business stakeholders and analysts gauge the overall financial position of a company and its capacity to handle its operating needs. The balance sheet can also help determine how to meet financial commitments as well as the best methods for using credit to finance your operations.
In general, the balance sheet is divided into three categories: assets, liabilities, and equity.
- Assets: These are usually organized into liquid assets (cash or assets than can be easily converted into cash), non-liquid assets (land, buildings, and equipment), and intangible assets such as copyrights, patents, and franchise agreements.
- Liabilities: These are debts that the business owes. They’re typically categorized as current or long-term. Current liabilities are due within one year and include items like accounts payable, wages, pension plan contributions, medical plan payments, building and equipment rents, temporary loans, and lines of credit. Long-term liabilities are payment obligations that are due after a one-year period. These may include long-term debt such as interest and principal on bonds, pension fund liabilities, and deferred tax liabilities.
- Equity: This can also be known as owners’ equity or shareholders’ equity. It is the remaining value of the company after subtracting liabilities from assets. Equity can also incorporate private or public stock, or even an initial investment from the founders of your business.
Cash Flow Statement: Demonstrates Increases and Decreases in Cash
Unlike an income statement, which shows how much money you’ve spent and earned, a cash flow statement tells you precisely how much cash your business has on hand for a specific period of time. If you use accrual basis accounting where income and expenses are recorded when they are earned or incurred—not when money actually moves into or out of your bank—cash flow statements are a necessary component of financial analysis. They show your liquidity; they show your changes in assets, liabilities, and equity; and they assist in predicting future cash flows. Additionally, if you plan on applying for a loan or line of credit, you will need current cash flow statements to apply.
by Pete McAllister | Accounting News, News, Tax, Tax Planning - Individual, Tax Preparation - Individual
Congress originally designed the Alternative Minimum Tax (AMT) to make sure wealthy taxpayers who take advantage of multiple tax breaks and itemized deductions would still pay their fair share in federal income taxes each year. The AMT produces around $60 billion a year in federal taxes from the top one percent of taxpayers. However, because the AMT wasn’t tied to inflation, the tax has extended down to a growing number of middle-income taxpayers. Here’s what to do about it.
AMT Primer
It’s called the Alternative Minimum Tax because it is a mandatory alternative to the standard income tax. If you are a high-income earner, you are required to calculate your taxes twice – once under standard tax rules and again under the stricter AMT rules (the AMT disallows many deductions, such as state and local tax, childcare credits, and property taxes). Ultimately, you are required to pay the higher amount.
Are You at Risk?
First, be aware of the triggers for AMT, as earning a higher income isn’t the only factor. For example, it can also affect those who are married and file jointly, have a large family (more than four dependents), enjoy profits from stock options, or live in a high-tax state. Therefore, any move that reduces your adjusted gross income (AGI) – like upping your contributions to qualified retirement accounts such as IRAs, 401(k)s, and health savings accounts – might help avoid the AMT. Additionally, aim to reduce your itemized deductions and increase your charitable contributions. Finally, pay attention to long-term capital gains – when you sell a home or other investments for a profit. These are taxed at the same rate under both the standard income tax and the AMT, but capital gains could put you over the threshold for AMT, thereby triggering it and disqualifying you from deducting state income taxes paid on the capital gains.
If you practice careful year-round preparation while being mindful of the above triggers, you’ll have a better chance of avoiding the AMT.
by Stephen Reed | Accounting News, News, Tax, Tax Consulting, Tax Planning
The majority of American taxpayers typically receive a refund from their federal tax returns, and in 2019 those refunds could increase by 26 percent, which is higher than previous years.
The jump in expected refunds is most likely a result of the recent tax overhaul that cut personal income tax rates so that workers can keep more of their income. Theoretically, such a change in taxes should prompt American workers to adjust their withholding rates accordingly through a Form W-4 with their employer. However, research shows that roughly 75 percent of tax payers, who historically over withhold from their paychecks anyway, only partially adjust those rates when new tax laws are introduced, or they don’t adjust them at all. This means that even more taxes are withheld from their paychecks than necessary, which results in a heftier refund.
The prospect of a bigger tax refund is enticing, and tax refunds are typically used to boost savings, pay down debt, and pay for vacations. But for those Americans who fall within the 75 percent of workers living paycheck to paycheck with little to no money in savings, over withholding is probably not the best move.
If Americans withhold more than necessary from their paychecks, they have less funds to apply to everyday expenses, financial goals, and life emergencies that pop up. If you are someone who might be over withholding and could benefit from an increase in your paycheck rather than waiting to see that money in your tax refund, see about submitting a new Form W-4 with your employer.
by Amanda O'Brien | Accounting News, News, QuickBooks, Resources
Summer is the perfect time to get your QuickBooks cleaned up. MKR provides hands-on training and consultation services for QuickBooks during this time of year. It is our pleasure to conduct an on-site visit to assist with any questions or concerns you have in working with your QuickBooks file(s).
We provide consultation by using our accountants’ tools. These tools can help reconcile bank accounts, troubleshoot payroll and bank imports, correct accounts receivable and accounts payable, and update inventory. We provide full-service training if you are new to the QuickBooks software, or partial-service training if you have been using QuickBooks but need assistance with just one area.
Our training is customized to your needs and your business. We walk through what you need from your QuickBooks and customize the best way for you to achieve those goals with your software. With QuickBooks products constantly changing, we are here to keep you updated on the modifications for your software. Now is the perfect time to take advantage of the assistance we provide, so that come tax time you are ready. Please do not hesitate to call!
We have three certified QuickBooks ProAdvisors. Learn more about what they can do.
by Brenda Eoff | Accounting News, Business Consulting, CPA, News, Professional Services, Resources, Tax
Two committees of the American Institute of CPAs (AICPA) – the Professional Ethics Executive Committee (PEEC) and the Accounting and Review Services Committee (ARSC) – have extended deadlines on exposure drafts of proposed revisions of existing requirements for nonattest services and of requirements for compilation services.
Requirements of Nonattest Services
The PEEC has agreed to extend the deadline from August 30, 2012, to November 30, 2012, for comments on an exposure draft dated June 29, 2012, of proposed revisions to Interpretation 101-3, “Nonattest Services.”
The committee is proposing that financial statement preparation and cash-to-accrual conversions performed by a CPA member for a client should be considered nonattest services and subject to the revised requirements.
Under the proposed revisions, the preparer is no longer required to perform a compilation with respect to those statements unless engaged to do so.
The exposure draft also considers the cumulative effect that providing multiple nonattest services can have on independence.
“We have extended the deadline because we want to give people additional time to understand the impact of these changes,” said Ellen Goria, senior technical manager of AICPA’s Professional Ethics Division. “We expect the major impact to be experienced by individuals who are preparing financial statements for attest clients. Their systems and processes may need to be modified so that they can be in compliance. We will be providing additional documents to explain this further,” she said.
Requirements for Compilation Services
The ARSC has extended its deadline for comment on proposed revisions to Statements on Standards for Accounting and Review Services (SSARS) to November 30, 2012. The proposed revised SSARS are AR section 70, Association with Unaudited Financial Statements, and AR section 80, Compilation of Financial Statements (Revised).
Existing SSARS require the accountant to perform a compilation engagement whenever the accountant prepares and presents financial statements to a client or third parties. Proposed revisions to SSARS would remove the preparation of financial statements from the attest function, the exposure draft says.
The AICPA stated in its announcement that the proposed SSARS would also “revise the objective of the compilation engagement and provide requirements and guidance when an accountant is associated with financial statements that were not subjected to a compilation, review, or audit engagement.”
The Exposure Draft, Association with Unaudited Financial Statements, includes the following requirements if an accountant is requested to be associated with unaudited financial statements.
The accountant should:
- Read the unaudited financial statements.
- Consider whether the unaudited financial statements appear free from material inconsistencies with other knowledge or information of which the accountant may be aware.
- If after performing the procedures in paragraphs 6a and 6b, the accountant decides to permit the use of the accountant’s name in a report, document, or written communication containing the statements, the accountant should request that the entity clearly indicate that the financial statements were not compiled, reviewed, or audited.
The proposed SSARS also addresses the accountant’s responsibilities when engaged to compile financial statements. The proposed revisions state that the objectives of a compilation engagement provide definitions and enumerate specific requirements that apply to compilation engagements.
The ARSC stated in its exposure draft that it “is supportive of proposed revisions of Interpretation 101-3 because it is in harmony with how the 2011 edition of Government Auditing Standards (the Yellow Book) treats the preparation of financial statements. The proposed clarification would also be consistent with the views of many practitioners who believe that the preparation of financial statements is a responsibility of management and an essential part of an entity’s system of internal control.”
