Personal Finance guide

The financial statement analysis process provides a systematic approach for extracting and evaluating the accounting information needed for a specific business purpose. Although every analysis is different, the process used is likely to be similar.

The financial statement analysis process includes establishing the goal or goals that the analysis is supposed to achieve which helps draw the analyst’s attention to the most relevant information. Typical general goals include screening, diagnosis, forecasting, and reconstruction. A full review of the financial statements and the notes produces a rounded view of the company and may call attention to specific areas that should be analyzed in detail. The selection of techniques to generate the information required depends on the goal of the analysis .As well as ratios, common techniques include common-size statements, vertical analysis, and horizontal analysis. The application of appropriate techniques is often a mechanical process, although care should be taken that differences in ratio calculation, accounting policies, asset valuation, and so on are understood so that a valid comparison between companies can be made. Finally, interpretation of the results requires putting the results in context- for example, by comparing results with industry benchmarks.

One technique used for analyzing financial statements is vertical analysis. It can be difficult to see even basic financial relationships when looking at the numerical values in a company’s financial statements. Therefore, it is helpful to construct common-size statements and perform a vertical analysis in order to look for any unusual percentages in the common-size statements that identify items that have an excessively large or small value when considered relative to other values reported in the same accounting period. Both single period and multiple period vertical analyses can be used.

Another technique used for analyzing financial statements is horizontal analysis. It involves making comparisons across two or more years of financial statements data. Although horizontal analysis techniques can be applied to the balance sheet to quantify the changes in current or total assets over time, this type of analysis is usually focused on quantifying the changes in a company’s profitability over time.

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Let us start with a simple question. When is it best to use the straight-line method or the Accelerated method when reporting depreciation? But, to answer this question the quadrant would need to understand the differences between the two. Recognize the benefits and faults of each method when put into practice. Is the straight-line depreciation method better suited for tax purposes or should it be used for financial reporting? The quadrant could look to industry; seeing that the straight-line method is used for reporting to stockholders by most firms. To see why we would need to study how the straight-line method works and why it is better used for financial accounting.

The key to understanding anything is to always start with the basics. The simple mechanics of how the straight-line depreciation method works and even what depreciation is. Simply defined depreciation is a term used to spread the cost of an asset over a span of several years. In other words, it is the reduction in the value while that asset is being used by the company or organization. The straight-line depreciation method is one way of recording this reduction in value. This method calculates the annual depreciation expense by taking the cost of the fixed asset minus the scrap value of that asset then dividing by the life span (the number of years the fixed asset will be in use). For example, a fixed asset that depreciates over six years is purchased by a firm. The cost of that asset is $35,000 and it has a scrap value of $5000. The calculated annual depreciation expense will be $5000. This method is used in financial accounting because it allows for the firm or organization to report a higher net income in the earlier years to the stockholders. Financially it makes the company or organization look better to current investors and future investors. But for tax purposes it might not be the company or organization’s first choice for recording depreciation. Often the company or organization will use a method such as the double declining depreciation method because of its benefit to maximize the early tax deduction.

How can the double declining depreciation method help with maximizing the early tax deductions for a company or organization’s fixed asset? When the method is broken down to mechanics it becomes easy to see. The double declining depreciation method, like the straight-line method, is another way to record the reduction in value of an asset while it is in use. In this method the annual depreciation expense is calculated by doubling the straight-line depreciation rate then multiplying it by the asset’s net book value at the beginning of the year. So, hypothetically, if a company or organization’s fixed asset has a twenty percent straight-line depreciation rate the double declining balance depreciation rate would be forty. But, unlike the straight-line depreciation method, when using the double declining depreciation the depreciation expense is recalculated each year using the previous year’s net book value at end of year. The early calculations are noticeably higher forcing higher taxes early on. But, the benefit to using the double declining balance depreciation method is that as the fixed asset is used throughout its life span the depreciation expense decreases significantly. So, companies and organizations choose this method so they can pay a larger sum of the taxes upfront instead of having to pay them further down the road.

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Depreciation can be easily defined as the decrease in value of any asset, through use, wear and tear, and age.

The first thing to be determining when depreciating an asset is its initial cost, which is the cost to purchase the asset plus any costs incurred to get the asset ready to use. Examples of these extra costs are: sales taxes, freight and installation costs.

After determining the initial cost and by the time the asset is placed in service, the expected useful life should be determined. According to the Internal Revenue Service guidelines, most machinery and equipment have a useful life of seven years, while automobiles and light duty trucks have a useful life of five years. Even though these are mandatory for federal income tax purposes, companies may decide using different expected useful life for financial reporting purposes.

The last information to be determined before depreciating an asset is its residual value at the end of the useful life. The residual value is the estimated value of the asset at the end of its useful life. The depreciable cost of the asset will be the difference between its initial cost and its residual value. As a consequence, if an asset is expected to have no residual value, the entire initial cost must be depreciated.

Among the several methods of depreciation, the most common are: straight line method, the 200 percent declining-balance method, the Service Hours method, the Sum of the Years Digits method and the Modified Accelerated Cost Recovery System (MACRS).

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If you are someone who has just started working or works for a small to medium sized business, there are some important things you should know in regards to accounting services. As is often the case, smaller businesses usually only employ a core staff of individuals who are all engaged in doing the same work, namely that of creating the unique service or product offered by the company. What this means is that oftentimes individuals within the company end up performing additional roles they are not completely comfortable with. The end result of this is a situation where there is the potential for harm to the company as well as the overworked employee.

This is especially true in the case of maintaining the company accounts, as this is something that requires a lot of time, knowledge and effort. Most small businesses think that engaging in this sort of practise is necessary in order to cut costs and remain competitive. However, this does not necessarily have to be the case. There are many low-cost accounting services that can be used in the larger Melbourne area. Using one of these firms for your organisation’s accounting needs will not place a large strain on your resources and will ensure that the job is done correctly.

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I received a email recently from an old client the topic was regarding Credit Card increases. Due to the latest legislation that was past earlier this year, credit card companies are trying to do anything and everything they can before the new rules are implemented on February 22, 2010. As we know the average consumer should never agree with “Big Business” at face value. So what are the big credit card companies trying to pull before February 22, 2010, first they have raised the bar for who they deem as “good consumers” in-turn marginalizing the majority of credit card holders. Second, research is showing from the Pew Health Group, that these unjust credit card practices have become even more rampant. Pew research, has also reported that not one of the card companies reviewed would meet the in Credit Card Act regulations passed earlier this year. Even after being called out, they do not even want to show face! At times I wonder how do they sleep at night. Are you surprised, I am not! Will Credit Card companies change there business practices, lets be realistic not until they are forced to.

Let’s keep the following practices in mind, because they are pretty alarming:

• 99.7% of companies have raised interest rates on outstanding balances
• 95% of card companies have engaged in harmful practices towards there customers
• 90% of card companies are using hair trigger option that would increase rates after a card customer makes just one or two late payments. Documentation shows that some payments have gone up 29%
• 12.24% and 17.99% is the median annual percentage rate used by bank credit cards

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The economic downturn will not stop people from spreading holiday cheer for there friends and family this year.

According to the latest Gallup poll, Americans estimate that they will spend on Christmas gifts somewhere around $600 which has been a consistent benchmark throughout the holiday season. On the nightly news, there was one answer that kept getting repeated, “I will worry about it later”. That thought stuck in my head for days as I was looking over economic data that showed double digit unemployment growth and the data of new job creation being a little misleading. After reviewing the information I came to the answer that the data is not the driving force.

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With personal debt growing, lack of GDP growth and unemployment in double digits understanding the world of credit is that much more important. If you are one of the lucky Americans that have not been impacted by growing personal debt, you know someone that has. Most people do not have time to read the fine print, but they should not have to feel victimized by Credit Card Companies. The following are six methods to protect your credit:

The importance of your Balance
It is important to not hold a revolving balance for a lengthy period of time depending on your credit history the result might be a reduction your is credit limit. Even if you are holding 20-30 percent of the overall debt of the card, which does not make you high risk, card holders with new or poor histories have a better chance of getting the rug pulled from under them.

Spreading around your debt
Let’s say your debt is over 30 percent of the limit of the card, industry professionals will recommend you to split your debt between to cards. The reason for this being so you can spread the debt and your credit, so you can be able to track your spending and credit card companies view an accumulation of credit on one card a dangerous trend. This will effect you credit history. Remember before making any actions with credit always review your credit history and talk to a professional.

Raise your score
When talking about credit always be proactive and take the necessary step to raise your credit score, so issuers cannot raise rates and lower limits. This can not be emphasised enough review your credit score and practice responsible spending habits.

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Paying off credit card debt is one of the highest searched terms in Google each day. We are living in a very bad economic crisis and honest, hard working people that used to have perfect credit scores and kept their credit cards safely put away in case of an emergency, are being forced to use them to pay for daily living expenses like buying milk or eggs.

Due to this situation, millions of Americans are falling behind on their payments, falling more and more into debt. Once you miss one payment, it starts snow balling from there and before you know it, you have several phone calls each day from creditors threatening you if you don’t pay. This keeps a lot of people up at night and it is filling our society with stress and fear. More marriages end each year due to credit debt than infidelity.

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THE N420 BILLION NIGERIA BANK STIMULUS: Some Economic and Financial Implications

Written By: Shafii Ndanusa MBA, ACCA, FAAFM

Nigeria and in fact the entire world economy has in the last five weeks witnessed the spectacle of the unfolding drama in the nations’ banking and financial landscape. A major stabilizing decision that was taken in the wake of the Central Bank of Nigeria’s intervention is the injection of some four hundred and twenty (420) billion Naira into the five hitherto unhealthy commercial banks. This rather humane and socially-responsible action itself has elicited a wide range of reactions from a cross section of the populace. Although, there appears to be some balance of reporting in terms of those who favor and those who oppose the CBN intervention. My personal view is that Nigeria is a developing country. More than ever before, this is the time Nigerians should pay great attention to facts, truth and objectivity. Based on the above criteria, people should then decide where to pitch their tents in matters of critical national importance. The era of primitive sentimentality, blind accusations and ill-informed contemplation clearly belongs to the dustbin of history.

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Finances have always been of utmost importance and handling it with complete responsibility can be quite a task. At the end of it all, you need growth, sustainability and security for your money. When you are in a far-off land and you need to be connected with your homeland financially, then the bank you choose plays a crucial role in your wealth management. NRI Accounts in banks offer you a lot more than just parking space for your hard-earned money. They have on offer a bouquet of services including financial planning, investments, lockers, etc.

The government of India introduced the rules for holding a NRI banking account in the year 1970. Within that purview, individuals leaving their country have found great convenience in maintaining their finances. Non-resident Indians can open any of the below mentioned accounts with their Indian bank:

NRE (Non Resident External Accounts)
It is an account by way of Savings, Current or Fixed Deposits in Indian rupees. The funds in this account are fully repatriable.
NRO (Non Resident Ordinary Accounts)
This account can be opened in the form of Savings, Current or Fixed Deposits in Indian Rupees. The only difference in this account is that the funds cannot be repatriated. However, the interest accrued over the deposits and investments is repatriable.
FCNR (Foreign Currency Non Resident Accounts)
All funds in this account are easily repatriable. You can only open a Fixed Deposit with this account in five major currencies of the world. The currencies are – US Dollars, Pound Sterling (GBP) and Euro.

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