Business Stuff Flashcards
Personal Balance Sheet items are listed at
FMV
Corporate Balance Sheet items are listed at
the lower of:
1. cost
2. FMV
Order of assets list on balance sheet
Most to least liquid on the left
Time period of a balance sheet vs a statement of cash flows
Balance sheet - snapshot in time
CF statement - period of time
Purpose of a balance sheet
statement of financial position
Purpose of a cash flow statement
shows cash movements
Balance sheet start and end points
Cash balance to retained earnings
Cash flow start and end points
Net income to cash balance
Balance sheet measures
Assets, liabilities, and shareholder equity
Cash flow statement measures
increases/decreases in cash
Purpose of a cross-purchase agreement
A method to completely transfer business interests among partners/owners using life insurance policies
Disadvantages of cross-purchase agreements
- Younger owners will pay more in premiums (for the other partner)
- Difficult to implement with a higher number of owners (more policies - n x (n-1))
Advantages of cross-purchase agreements
- Simple for small number of owners
- Tax-free benefit
- Increase in basis**
Purpose of an entity purchase agreement
A method to completely transfer business interest back to the business using life insurance
Advantages of entity purchase agreements
- Businesses with multiple partners
- Death benefit is tax-free to the business
- Business pays the premiums
Disadvantages of entity purchase agreements
- No increase in basis
- Surviving owners will have substantially more gain (due to lack of step-up)
Number of policies required in an entity purchase agreement
Same as the number of partners
Number of policies required in a cross purchase agreement
Number of partners x (number of partners - 1)
Purpose of a wait and see agreement
A method to transfer business interests that offers flexibility to the partners and the business as they purchase business interests
Steps for a wait & see agreement
- Business has the option to purchase
- Surviving partners have the option to purchase
- Business is required to purchase
Design of a buy-sell agreement using “wait and see”
Any option:
1. Entity Purchase
2. Cross-Purchase
3. Hybrid
