Finance - Limitations & Ethics

Question 1

Limitations - Normalised earnings

Answer 1

Earnings that have been adjusted to take into account inflation or have removed one off large profits or losses to smooth out the overall earnings

e.g. You might remove that one massive sale of a factory you had which wouldn’t usually happen in a regular year

Question 2

Limitations - Capitalising earnings

Answer 2

The listing of capital expenditure as an asset on the balance sheet rather than an expense on the income statement

e.g. Your company spends $100000 this year developing a half-finished product; whether this money spent is treated as an asset or a cost will make the financial reports read differently.

Question 3

Limitations - Valuing assets

Answer 3

Overquote or underquote their value which limits the usefulness of the financial reports

e.g. machines are worthless in 5 years time, so we lower the price by 20% per year. In this instance we would declare the computers to be worth $60000

Question 4

Ethics - Record keeping

Answer 4

– all data must be accurate and honest
– Business may be tempted, to collect cash and not record it in order to lower taxes,
– Businesses found committing tax evasion, this can harm reputation of business, and alienate customers who wish to deal with honest and ethical businesses.

Question 5

Ethics - Reporting practices

Answer 5

– Accurate financial reports necessary for taxation purposes, but other stakeholders are entitled to access a business financial information.
– Overstating or understating profit, can work negatively towards business e.g if they wish to understate profit to decrease tax, may make it harder in order to raise funds through shareholders or banks for additional funds.
– Over or under stating value of assets may be counter productive when potential buyer subject reports to close scrutiny.

Question 6

Ethics - Tax minimisation practises

Answer 6

e.g Apple

Apple uses transfer pricing to shift its taxable profits from Australia to Ireland. As a result apple was taxed less than 2% of its revenue in Australia in 2018.
The ATO audited Apple and added them to a ‘name and shame register’ but found that they hadn’t actually broken any tax laws.