Month: December 2016

Debt to Equity Ratio

Another leverage ratio used to evaluate the financial integrity of a business is the debt to equity ratio.  It is strictly a bottom half balance sheet ratio.  Its result explains the relationship of volume of debt and corresponding equity to finance the operations of a business, i.e. the purchase of assets.

Net Profit Margin

Net Profit Margin

The net profit margin reflects the profitability of the company as a percentage of net sales.  It is one of the performance ratios used in evaluating business.  Interestingly, some consider it the most important ratio.  These users of business ratios take a very simplistic approach towards business evaluation. 

Return on Assets

Return on Assets

One of the performance ratios used in business identifies the overall ability of management to efficiently utilize resources to generate a profit.   Corporate resources include human knowledge/skills and the balance sheet assets of the business.   The labor component is unquantifiable in terms of dollars, but assets with a dollar value associated with them are reflected on the balance sheet.   The return on assets measures management’s ability to earn a profit  on these balance sheet assets.

Corporate Documents – Introduction

Corporate Documents

‘The job isn’t done until the paperwork is complete’, a popular axiom used especially in business.   It identifies with the requirement that every corporate entity maintain its legal status and understanding between all investors and the management team.  These understandings are the essence of the “formation” of the corporate entity.  Failure to do the paperwork can create legal snafus such as the loss of corporate protection for both officers and owners of the company

Aggregate and Entity Theories of Partnership

Aggregate and Entity Theories of Partnership

A partnership is defined as an association of two or more persons to carry on as co-owners a business for profit.  The premise is built around the notion that the combined power of the partners exceeds the sum of the value the partners could generate independently.

Break-Even Analysis – Fundamentals

Break-Even Analysis - Fundamentals

Breakeven analysis is a managerial (cost) accounting tool used to examine the relationship of price to cost of a product.   It also considers various sales volumes and the effect on profit given the different relationships of price to cost.   The breakeven analysis is an essential tool in maximizing profit with the least amount of resources.

Economic Substance Principle

Economic Substance Principle

The taxpayer must prove that the underlying economic transaction was not concocted to avoid or reduce tax liability. In the Gregory Vs.  Helvering case,  the Supreme Court actually uses the word  ‘sham’.

Business Trusts

Business Trusts

The common law definition of a business is an investment of capital or property by individuals which creates the means to carry on towards the goal of generating a profit.   Every state recognizes different legal formats to conduct business.   The simplest and most common is the sole proprietorship .   Other forms include partnerships, limited liability company and of course corporation status (S-Corporation is a federal tax option of a corporation).   However, two states actually recognize another legal format – business trusts.

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