## Saturday, December 31, 2016

### Days in Accounts Receivable Ratio

Cash flow is the most important short term factor in business survival. The days in accounts receivable ratio is a key barometer of the funding situation of a company.

A company that provides customers credit, or that allows payments over time needs to have a good understanding of when they can be expect to be paid.  Looking at historical ratios can provide insight, as well as offering an opportunity against other companies.

The days in accounts receivable ratio is, as the name implies, is the calculation of how many days of cash are locked up in receivables.  Receivables are the money is that is owed the company.

Calculating Days in Accounts Receivable (A/R)

There are two factors involved in the calculation:

The accounts receivable at a point in time.

The revenue generated by the company over a specific period.

An example with the following variables:

Revenue over the first three months of the year equals \$90,000.

Accounts receivable on the books at 3/31 equals \$30,000.

Days in A/R are calculated by dividing revenue by the number of days in the period to get the average daily revenue and then dividing that number into the accounts receivable.

Average daily revenue (\$90,000 divided by 90 days) = \$1,000 per day

A/R (\$60,000) divided by average daily revenue (\$1,000) = 60 days in accounts receivable.

The Importance of Days in Accounts Receivable

What this calculation is saying is that on average it will take 60 days to collect what it is owed.  If the company pays its bills today, it will take 60 days to replace that money.   The company must have a reserve of \$60,000 in order to remain solvent.

The ratio is best used as an indicator to compare time periods or against like companies.  If the number is increasing from a prior year, it may indicate a problem.  The company can positively impact the ratio by becoming more aggressive in collecting debts.

Since industries differ in customers and payment terms, it may not helpful measure against non-similar companies.  Comparing against a competitor or an industry benchmark can inform the company on the success of its credit and collection efforts.

Limitations of the Days in A/R Calculation

This calculation is only valid if the company has a solid history of generating revenue and collecting bills.   A new company is likely to have a lower ratio, but keeping the ratio at 60 days (for instance) means that as new revenue is generated, the older accounts have to be collected.

Many companies use the 90 days measurement of revenue, but other time periods may be more appropriate.  Too short a time frame may give inconsistent and less useful results, and too long may be useful in spotting trends.

Days in Accounts Receivable is an important business ratio, but to get the full picture of a company, it should be combined with other measurements, including return on investment and net income.

## Friday, December 30, 2016

### Choosing a Career in Accounting

Accounting is a growing field with lots of opportunities, but the lifestyle is not for everyone.  Having a steady job is good, but there are trade-offs to making money.

When making a career choice, many young people with an affinity for numbers make a decision to enter accounting.  Business schools have bachelor programs for accountants, and there are openings in businesses, government and auditing firms.

Questionable business practices and the resulting government regulation have increased positions for accountants.  A Certified Public Accountant with expertise in Sarbanes-Oxley compliance is very valuable.

The long hours, hard work and pressure situations make the accounting field inappropriate for everyone.  Even those with great mathematical skills may be ill-suited to the rigor and monotony of the life of accountant.

Positives of an Accounting Career

The primary reason many end up in accounting is that it is a specific career.  Courses taken in college provide specific training. Many students can walk out of college and apply the lessons immediately at a job.

In contrast, a major in mathematics or economics does not train the student for a particular occupation.   There is more flexibility, but less security.

Accounting is an indoor job, not a lot of heavy lifting, other than briefcases.  Today, computers play a large role, and accountants need to be able to use spreadsheets and word processing software.

As a white collar occupation, the pay is good, with starting salaries above \$50,000 in some markets.  Mobility is fairly easy, within a country.  Crossing borders is more difficult since rules vary by country.

Accounting is not bookkeeping.  There is considerable challenge in identifying issues and solving mathematic problems.  There is often interaction with others, which may include clients, peers or subordinates.

There are many opportunities for advancement, to the highest financial position in the organization; partner, chief financial officer or treasurer, depending on the type of company.

Negatives of an Accounting Career

Accounting is a rigorous profession.  Most accountants, especially at the beginning of their career, are expected to work long hours and weekends.

Staff at auditing firms, particularly, work many hours in their first years, doing basic accounting reviews on the road, in firms that tolerate their presence at best.

The expression used at these firms “three years, up or out” embodies the experience.  Staff either get used to the hours, or move to other companies or professions.

The work can be tedious and become monotonous.  In a business, there is a regular month end closing process, and no vacations can be taken during this time, and weekends are expected.

There is a stigma of the bean counter, evidenced by people in other professions.  The role itself is a matter of monitoring and reporting on others, rather than creating business.  It is not a good fit for an entrepreneurial person, or someone needing a lot of human interaction.

With the long hours and indoor work accomplished mostly by sitting, it is not a healthy occupation.

Finding the Right Career

A student should carefully assess their strengths and desires before deciding on a career.  Accounting offers stability and financial rewards, but requires mathematical ability and a strong work ethic.

## Thursday, May 2, 2013

### Your First Job as a Corporate Accountant

Those considering a career in accounting and those that have completed their college coursework will want to have an idea what awaits them when they finally start that first job in accounting.  Accounting is a worthwhile, stable and generally well-paid vocation, but starting out can be difficult and stressful.

There are many distinct fields of accounting that one can wind up in for a first position.  Public Accounting, or acting as an outside auditor, is one of the better known, but virtually every organization larger than a few employees needs an accountant.  Companies, hospitals, and governments all need financial statements put together by accountants for auditors to audit.

Although each type of job, and every company, is somewhat different, as someone starting your first job, there are a number of things you can expect no matter where you happen to fall.

Jobs for a Beginning Accountant

Since you are starting out at the bottom, it is very likely you are going to be assigned the most menial task that the office has, something no one else wants to do.  You’ll find that four years of intense study at the university is more of less useless in your first few months.  No one will give you anything to do that requires advanced accounting knowledge.

Depending on how technically advanced your office is, the first few jobs will consist of working with an already created database, collating financial documents, or filing away all the reports that have been waiting for your arrival.  A novice isn’t going to be trusted with presenting to the board of directors or reviewing the CFO’s work.

The most likely job a beginning accounting will get is to prepare the bank reconciliation.  In a large company, this is usually tedious work and will likely be several months behind.  Preparing account reconciliations is pretty safe work to hand to a novice, as is preparing journal entries.  Expect to have to do several revisions, as accountants are very particular people by nature.

Hours of Work

A beginning accountant is expected to be at work the same hours the senior staff do, even if they haven’t been trusted with much work to do.  Expect to be there late into the evening and some weekends, especially if it tax or budget time.  It is most important to look busy when any of the big bosses are around.

Eventually, newer accountants are given more meaningful tasks under close supervision.  How long depends on the size of the company and whether any vacancies appear above.   The novice can look forward to years of doing financial program analyses, monthly closes and dealing with bankers, auditors and department heads, if they can get through the first few months and years.

# Is Getting a Big Income Tax Refund a Good Idea?

### U. S. Income Taxes that are withheld in excess of the tax liability are refunded each year. Some taxpayers intentionally overpay their taxes to get a large refund.

In the United States, persons who are employed are required to file a W-4 form with their employer. The form provides information on the employee, including social security number, name and address, as well as tax information.

The W-4 includes how many withholding allowances the employee is claiming and marital status. This choice, along with their wages earned, determines how much tax will be deducted from the paycheck. Allowances are similar to exemptions on the tax form, but do not have to be the same. For instance, the taxpayer can claim zero allowances even though they claim an exemption on the return.

### Underpaying Income Taxes

Claiming too many allowances will result in underpayment of tax. Significant underpayments are subject to penalties and interest. It is therefore important to claim enough allowances, or to make estimated payments.

### Overpaying Income Taxes

Claiming fewer allowances, or withholding additional tax than necessary to meet the tax obligation, will result in a refund. Some taxpayers intentionally claim more than necessary in order to get a large refund. The reason for this is to get a large amount of money at one time. Receiving the money spread over the whole year may result in the money being spent, not saved. For example, a \$2,600 refund may get deposited for a special occasion, but \$50 a week may just be put toward the bills.

The standard response for those getting a big refund is that they “are giving the government an interest-free loan” since the there is no interest earned. To some employees, a forced savings program may be an advantage over earning a few pennies in interest.

### The Withholding Impact of the 2009 Stimulus

For taxpayers earning less than \$75,000, the IRS will be reducing taxes with the Making Work Pay Tax Credit in the American Recovery and Reinvestment Act of 2009 (the 2009 Stimulus). There will be credits of \$400 to \$800, depending on income. In order to accomplish the goal of stimulating the economy, the tax tables will be adjusted for the credit some time in spring.

Taxpayers who do not adjust their W-4 will receive more in their paychecks, and can anticipate the same refund that they would have gotten without the stimulus. If taxpayers adjust their W-4 to receive the same amount of taxes taken out, they would receive a larger refund. The government allows taxpayers to adjust their W-4s at any time, although employers may have restrictions on how often they can be changed.

Taxpayers should determine how important refunds are compared to having the cash in their pockets. Underpaying carries great risks, but wisely choosing withholding allowances can result in bigger paychecks and the option of stimulating the economy.

# Lower your Taxes by Deferring Income and Maximizing Deductions

### Using discretion when recognizing income and paying expenses can help reduce payouts and maximize refunds on United States income taxes.

Taxpayers who use the cash basis of accounting can reduce their United States federal tax burden by adjusting when income is received and expenses are incurred. Sometimes the effect will only be temporary, but in other cases permanent savings will be generated.

Cash basis accounting is a different method from accrual accounting. In cash basis, income and expense are recorded when they are paid. Accrual accounting recognizes these when they are incurred.

The following examples relate to the taxpayer using cash basis accounting.

### Effect of Timing on Income

The simplest example of timing is in delaying taxable income until the next year. If there is any ability to defer taxes until after the end of the tax period (usually January 1), money received will not be taxed until the next year.

If the taxpayer falls into a lower tax bracket in the next year, this will result in actual savings. Alternatively, it may actually be better to move taxes into the current year if income (and the resulting tax rate) is low.

This is the principle being 401Ks and IRAs, which defer taxable income until after retirement. This is not true for Roth IRAs, which do not feature tax deferral.

It may be rare to find a circumstance where income can be deferred, but if the situation applies, it is smart to take advantage of it. In cases where the alternative minimum tax situation applies, consulting with a tax professional may be appropriate.

### Effect of Timing on Deductions

There is much greater flexibility in determining the timing of expenses for deductions. Expenses are recorded when paid.

Generally, paid means when the funds leave the taxpayer’s possession. Checks that are mailed are based on the postmark date. Credit card transactions are considered to be as of when the charge is made, not when the balance is paid off.

Why is this important? Creating deductions before the end of the year lowers taxes in that year. Paying real estate taxes, estimated state taxes, or employee expenses early can defer taxes for the cash basis taxpayer.

There are other opportunities for real savings, not deferrals, built into the tax code. Deductions from federal tax can be used two ways:
• The Standard Deduction
• Itemized Deductions
The taxpayer is entitled to take the greater of these two. It is legal and smart to consider whether tax can be reduced by combining as many deductions in one year to maximize itemized deductions, and then claiming the standard deduction in the alternate year.

For example, a taxpayer may have \$5,000 in deductions in each of two years, but has the option of prepaying \$1,500 in real estate taxes in year one.

If the standard deduction is \$6,000, it makes financial sense to pay the taxes early. Then the itemized deduction of \$6,500 can be taken in year one. In year two, the standard deduction of \$6,000 is greater than the remaining \$3,500 of itemized deductions.

Other savings can be garnered from areas where there are limitations. Medical deductions have to exceed 7.5% of adjusted gross income (AGI) to be deductible.

The taxpayer with high medical costs will benefit by maximizing payment in one year, even the amounts exceed the threshold. Similarly, the category of other deductions must exceed 2% of AGI.

Although taxpayers are obligated to pay the appropriate amount due to the Internal Revenue Service, the tax code has provisions that enable honest taxpayers to reduce their burden by the effective use of timing. Always consult a tax professional for specific questions on your situation.

## Why the IRS Law is Important to Short-term Traders

### The Wash Sale Rule prevents taxpayers from deducting losses on some investments that are repurchased. When does it apply and what are the reasons behind the rule?

The Internal Revenue Service is the governing body with respect to United States tax laws. The IRS allows many legitimate deductions from income, but as investors have developed ways to take advantage of the rules for inappropriate benefit, the IRS has issued regulations to enforce the spirit of the laws.
One of the legitimate deductions is allowing a taxpayer to deduct losses on investments, up to a current annual maximum of \$3,000 for a single taxpayer.
The law also allows losses on investments to be used to offset gains. The wash sale rule was instituted to make sure this is not abused. Losses cannot be deducted from sales or trades of stock or securities in a wash sale.

### IRS Definition of Wash Sales

IRS Publication 550 defines a wash sale as:
When an investor sells or trades stock or securities at a loss and within 30 days before or after the sale they:
• Buy substantially identical stock or securities,
• Acquire substantially identical stock or securities in a fully taxable trade, or
• Acquire a contract or option to buy substantially identical stock or securities.

### The Importance of the Wash Sale Rule

Because the IRS allows taxpayers to deduct losses against gains, the IRS issued the rule to prevent traders from taking sham losses in order to reduce taxes on gains.
For example, an investor might have a \$5,000 in realized gains (based on sales that have already occurred), and have an open position in XYZ stock that is sitting at a \$5,000 loss. With no additional transactions, the investor would owe taxes on the \$5,000 in realized gains.
The investor could sell the open position and realize the \$5,000 loss, netting his taxable gain to zero. However, the investor may believe that XYZ stock will recover and does not want to give up his position.
If he buys back the stock within 30 days, even after the year has ended, he cannot deduct the loss, and will still have to pay taxes on the \$5,000 realized gain.
To be clear, the law does not prevent him from selling or buying back the stock, but does not allow the deduction. The IRS only prevents the deduction of sham losses, which it defines as buying back in investment in 30 days.

### Strategies Regarding Wash Sales

Wash sales can occur any time of year, but are most significant near and just after the end of a tax year. The law is based on facts, it does not matter what the intent of the trader is.
In order to fully comply with tax law and still minimize taxes:
• Consider selling an investment and buying back more than 30 days after the sale. The rule is hard and fast, anything over 30 days does not count as a wash sale, whatever the intent.
• After selling, buy an investment which may be similar in nature but not substantially identical to the investment sold during the 30 days period. Retail giants Walmart and Target may be similar, but their stocks are anything but identical.
• Remember, at best tax loss selling is a delaying strategy. The decision to delay recognition of taxable income should take into account the taxpayer’s entire situation.

# The United States IRS offers a deduction for home mortgage interest. Does it make sense to buy a home just to benefit on the tax savings or save money on rent?

Renting has been compared to throwing money away. Homeowners can build equity and in the United States, can deduct home mortgage interest off their income taxes.

The Internal Revenue Service allows taxpayers to deduct mortgage interest from adjusted gross income (AGI) on Schedule A. The deduction is limited by the actual amount paid and AGI.
The tax savings may be beneficial, but the way taxes are calculated can reduce the positive impacts.

### The Standard Deduction versus Itemized Deductions

One of the key calculations relates to the Standard Deduction. The Standard Deduction is an amount that any taxpayer can subtract from AGI in order to arrive at Taxable Income, without itemizing deductions.

For instance, the Standard Deduction for 2008 returns was \$5,450 for single taxpayers and those married filing separately. If Adjusted Gross Income was \$56,450, a taxpayer taking the standard deduction would have Taxable Income of \$51,000.

However, taxpayers are allowed to take the greater of itemized deductions or the standard Deduction. Itemized deductions are computed on Schedule A and include home mortgage interest, real estate taxes and medical expenses over 7.5% of AGI, as well as other deductions.

### Example of Deductions from Taxable Income

For example, itemized deductions on Schedule A may be:
State Taxes - \$2,000
Real Estate Taxes - \$1,000
Home Mortgage Interest - \$2,500
Charitable Contributions - \$500
Total \$6,000
The taxpayer above would be able to deduct the itemized amount of \$6,000. This is an increase of only \$550 over the amount they could deduct without the home deductions.

The tax savings are only \$550, which is multiplied times the tax rate, which may be 28%. \$3,500 in home taxes and interest result in a savings of income taxes of only \$154.

For these set of circumstances, it can be seen that there is a very small amount of tax savings generated by the home mortgage interest and tax expense. Rules can be complicated. Individual help is available by phone at 1-800-829-1040.

### Positives of Home Ownership

Tax savings are likely to be greater in the first few years of a mortgage, because as the loan is amortized, interest is higher and principal payments are lower then. As more of the principal is paid off, interest, and the corresponding tax savings, are decreased.

There are other reasons for buying a home rather than renting, including the gain in equity from paying principal, and the possibility of appreciation. The mortgage payments can be fixed, as opposed to rent, which can be increased by the landlord (although real estate taxes are subject to increase).

People considering buying a home should take these factors in account and not just assume that buying will generate substantial tax savings. Each person’s situation will be different, and some may find that renting is a better financial choice.