Accounting

The theory states that regulations are manipulated to fit the requirements of those affected by them. The theory suggests that over a given period of time regulations serve the interests of the industries concerned. This theory was designed by political scientists (J. Hertog. General Theories of Regulation, 1999, pg 235).

Advantages of capture theory
The theory clearly explains the main intentions of designing regulations. The individuals to be affected by the regulations are directly involved in the formulation of these regulations. Therefore, there is adequate representation of the politicians as well as the interest groups since the regulations are drawn for their needs (Stigler, J. G. The Theory of economic regulation, n.d. pg 3).

Limitations of capture theory
The theory does not provide a significant difference from the public interest theory. The theory suggests that the public interest is the beginning of regulations. This is a similar suggestion postulated by the public interest theory (J. Hertog, General Theories of Regulation, 1999, pg.236).

Capture theory does not explain clearly how an industry can subject an agency to its interests but cannot resist its formation. Regulations seem to favor the consumers rather than the industry. The industries under regulations are required to offer services beyond their capacity. Excess regulations reduce the profits that industries make. For example, regulations on environment, labor, and many others make companies to reduce profitability (J. Hertog. General Theories of Regulation.1999, pg 236).

Similarity of economic interest theory (private interest theory) with capture theory
The two theories suggest that politicians aim at maximizing their utility. The politicians aim at maintaining political power in their efforts to design regulations for the industries. They seek money, votes and resources from the groups that are favored by the regulations (M. J. R. Gaffikin, Regulation as an Accounting Theory, 2009, para 25).

The theories suggest that regulations are driven by forces of supply and demand. The government represents the supply side while the interest groups represent the demand side of the argument. The groups require the regulations for their survival in the market while the government is the only one which can provide such regulations (B. L. Benson, The economic theory of regulation as an explanation of policies toward bank merges and holding company acquisitions, 1983, pg 839).

Differences between capture theory economic interest theory (private interest theory) and capture theory
The capture theory suggests that regulations are designed to fit the demands of those affected by them. On the other hand, the economic theory suggests that regulations are generated from the forces of supply and demand. The government is assumed to be the supplier while the interest groups are assumed to be on the demand side of the argument (B. L. Benson, The economic theory of regulation as an explanation of policies toward bank merges and holding company acquisitions, 1983, pg 849).


The government should consider the interest of the individuals and organizations to be affected by the regulations. These groups should be involved in the decision making concerning the formulation of the regulations. Regulations are designed to benefit those who are affected by them. The benefits may be negative or positive.  The politicians as well as the interest groups benefit from the regulations. The theory is more inclusive since it ensures that all the stakeholders are involved in the designing of the regulations.

COSTCOSTCurrent Year of SalesPrevious Year of SalesInspection9001.27501Quality engineering5700.76420.056Depreciation of testing equipment2400.322100.28Rework labor1,50021,0501.4Statistical process control1800.2400Cost of field servicing9001.21,2001.6Supplies used in testing600.08300.04Systems development75014800.64Warranty repairs 1,0501.43,6004.8Net cost of scrap 1,1251.56300.84Product testing1,2001.68101.08Product recalls75012,1002.8Disposal of defective products9751.37200.96Total Costs10,2001411,62215
2.

3.    The management of the company emphasis more on quality of the products over past few years due to which the total cost has decreased from 15 to 14. Although, the company reduces its costs but on overall basis the company has a pathetic distribution of quality costs. Majority of costs either in the form of traceable or external failure costs. Moreover, the tendency of companys management is more on prevention and appraisal. During the last year, the internal failure costs rises due to the defective goods, amelioration on goods before shipped to the customers, etc. External failure which is in the form of Cost of field servicing, Warranty repairs and Product recalls are declined sharply from 6.9m to 2.7m. If the management of the company focuses more on prevention then its total costs will continue decline in years to come. Moreover, the management should take preemptive measures in order to reduce its internal failure costs by designing a quality product that reduces the probability of internal failure costs.


PROBLEM 2-22

COSTCOSTCurrent Year of Total Production Cost of Total Quality CostsPrevious Year of Total Production Cost of Total Quality CostsPrevention costsMachine maintenance1202.5020.34701.6710.45Training suppliers100.211.6900.000.00Quality circles200.423.3900.000.00Total prevention costs 1503.1325.42701.6710.45Appraisal costsIncoming inspection400.836.78200.482.99Final testing901.8815.25801.9011.94Total appraisal costs1302.7122.031002.3814.93Internal failure costsRework 1302.7122.03501.197.46Scrap701.4611.86400.955.97Total internal failure costs2004.1733.90902.1413.43External failure costsWarranty repairs300.635.08902.1413.43Customer returns801.6713.563207.6247.76Total external failure costs1102.2918.644109.7661.19Total quality cost59012.29100.0067015.95100.00Total production cost4,8004,200
After the computations and assessments it is clearly indicated that the program of Mercury, Inc.s has been successful because 
Total quality costs (TQC) declines from 15.95 to 12.29.
External failure costs also declined from 9.76 to 2.29. This is a great achievement of the companys management because the current decline in external failure costs will certainly improves the sales in years to come.  
Internal failure costs uplift due to the rise in the defective unit on frequent basis before the unit shipped to the customers. In addition, prevention costs also increases which is fair enough for the companys future perspective.
In addition, appraisal costs also rise from 2.38 to 2.71.

EXERCISE 5-3
1.

Occupancy Days         Electrical Costs
High activity level (August)              2,406             5,148
Low activity level (October)             124                 1,588
Change                         2,282             3,560

Variable cost      Change in cost  Change in activity
 3,560  2,282
 1.56 per occupancy-day

Total cost (August)                                 5,148
Variable cost element (1.56 per occupancy-day  2,406 occupancy-days)         3,753
Fixed cost element                                1,395

2.    Electrical cost varies due to seasonal variation. In real sense, the electrical cost at its peak in the season of winter rather than summer because less natural light is available in winter. In addition, fixed cost will also impact due to the number of days in a month. One thing should take into consideration that cost of light is variable because of number of days in a month but on contrary cost of light is fixed because of occupancy of rooms during the month. Other factor like wastage of electricity also makes an impression on the electrical cost of the company.      

PROBLEM 5-16

1.    Depreciation expense        Fixed
    Advertising expense        Fixed
    Insurance expense        Fixed
    Cost of goods sold        Variable
    Salaries  Commission         Mixed
    Shipping Expense            Mixed

2.   
Units    Salaries  Commission Exp.         Shipping Exp.
High activity level             5,000        90,000                38,000
Low activity level                 4,000        78,000               34,000
Change                    1,000        12,000               4,000

Variable cost (Salaries  Commission Expense)          Change in cost  Change in activity
                             12,000  1,000 units
                            12 per unit

Variable cost (Shipping Expense)                  Change in cost  Change in activity
                             4,000  1,000 units
                            4 per unit

Salaries  Commission Exp.    Shipping Exp.
Cost  High activity level                       90,000                38,000
Less Variable cost
    (5,000 units x 12)            (60,000)
    (5,000 units x 4)                               (20,000)
ELEMENT OF FIXED COST                 30,000                18,000

Cost formula for Salaries  Commission Expense        30,000A12
Cost formula for Shipping Expense                18,000A4

3.                    INCOME STATEMENT

    Sales (5,000 units x 100 per unit)                        500,000
    Less Variable expenses
        Salaries  Commission Expense (5,000 units x 12per unit)        20,000
        Shipping Expense (5,000 units x 4per unit)                60,000
        Cost of goods sold (5,000 units x 60per unit)            300,000
    Contribution Margin                            120,000
    Less Fixed expenses
        Depreciation expense                        15,000
        Salaries  Commission Expense                    30,000
        Shipping Expense                            18,000
        Advertising Expense                        21,000
        Insurance Expense                        6,000
    NET OPERATING INCOME                            30,000   

EXERCISE 6-10

1.    Sales  Variable expenses  Fixed expenses  Profits
    30Q  12Q  216,000  0
18Q  216,000
Q  216,000  18 per unit
Q  12,000 units, or at 30 per unit, 360,000

2.    The contribution margin  break even is 216,000.

3.    Sales  Variable expenses  Fixed expenses  Profits
    30Q  12Q  216,000  90,000
    30Q - 12Q  306,000
    18Q  306,000
    Q  306,00018
    Q  17,000

4.    Margin of safety (in dollars)        Total Sales  Breakeven sales   
                        450,000 - 360,000
                        90,000

    Margin of safety (in percentage)        Margin of safety (in dollars)Total Sales x 100
                        90,000450,000 x 100
                        20

5.    CM ratio            510,000306,000 x 100
                60       
Expected total CM (500,000 x 60)        300,000
Current total CM (450,000 x 60)            270,000
Increment in Contribution Margin            30,000


EXERCISE 6-13
A.

CASE  1Per UnitCASE  2Per UnitCASE  3Per UnitCASE  4Per UnitNumber of units sold15,0004,00010,0006,000Sales 180,00012100,00025200,00020300,00050Less Variable expenses120,000860,0001570,0007210,00035Contribution margin60,000440,00010130,0001390,00015Less fixed expenses50,00032,000118,000100,000Net operating income10,0008,00012,000-10,000
B.

CASE  1Avg.CASE  2Avg.CASE  3Avg.CASE  4Avg.Sales 500,000100400,000100250,000100600,000100Less Variable expenses400,00080260,00065100,00040420,00070Contribution margin100,00020140,00035150,00060180,00030Less fixed expenses50,000100,000130,000185,000Net operating income7,00040,00020,000-5,000
EXERCISE 8-20

1.    COMPUTATION OF UNIT PRODUCT COST AS PER THE CURRENT COSTING SYSTEM
Rascon         Parcel         Total
No. of units produced (I)                    20,000        80,000       
Direct labor hours (per unit) (II)                0.40        0.20
Total Direct labor hours (I x II)                8,000        16,000        24,000

Total manufacturing OH (I)        576,000
Total Direct labor hours (II)        24,000
Predetermined OH rate (I  II)        24 Direct Labor hours

Rascon         Parcel    
Direct material                                13        22
Direct Labor                                6        3   
Manufacturing OH applied   
    0.40 Direct Labor hours per unit x 24 Direct Labor hours        9.60
    0.20 Direct Labor hours per unit x 24 Direct Labor hours                4.80
Unit product Cost                            28.60        29.80

2.

Activity rate (labor related)        OH cost  Expected Activity
                    288,000  24,000 DLH
                    12 DLH

Activity rate (Engineering design)        OH cost  Expected Activity
                    288,000  6,000 Engineering hours
                    48 Engineering hours
 Total overhead cost 576,000 split equally in 288,000 and 288,000.
     RASCON               PARCEL
EXPECTED ACTIVITY   AMOUNT     EXPECTED ACTIVITY   AMOUNT
DL hours  12                8,000            96,000             16,000            192,000   
Engineering hours  48            3,000            144,000                3,000            144,000   
Total assigned OH cost (I)                        240,000                    336,000   
No. of units produced (II)                              20,000                         80,000     
OH cost per unit    (I  II)                    12                4.20
       
SUMMARY OF UNIT PRODUCT COST
Rascon         Parcel
Direct material            13        22
Direct Labor            6        3
Manufacturing OH applied        12        4.20
Unit product Cost        31        29.80
   
3.    It is clearly noted that on one hand unit product cost of Parcel dip with 29.80 and on the other hand unit product cost of Rascon incline with 31.The sole reason behind  this difference is engineering design hours which is half applied instead of DL hours. In general, when OH is applied on the basis of DL hour majority of OH makes a reflection on high volume product whereas when OH is applied on the basis of engineering hours most of the OH cost makes reflection on the low volume of product. Moreover, the activity of engineering hours is a product level activity so higher volume reported lower unit cost and vice versa.

Securitization involves transforming illiquid assets into securities. Distribution of securities through securitization has dominated the U.S market for over the last three decades with the most recent mortgage backed securities which formed a basis for the global economic crisis (Shin, 2009). Securitization of the securities concentrated the risks in that it induced banks and financial institutions to buy each other securities with borrowed money.

 The securitization is to many in the accounting profession an issue with balance sheet management by banks. Initially, securitization was meant to disperse risks associated with bank lending, to some stable investors who were in a capacity to absorb the risk instead, the risks were directed to the banking sector and the financial intermediaries. The reason was that banks wanted to increase their leverage in a way that they would increase their profit in the short run. Investors had believed that through securitization, credit risk would be dispersed.

Another role played by the securitization was that the mortgage backed securities were dominated by unscrupulous traders who had the sole intention of reaping from the misery of others who had little or no knowledge regarding the securities.  Also, economists had relied on the wrong data while rating the securities at A. This influenced the public to believe that the securities were not risky at all (Fagan, Frankel, 2008)
Securitization played a role in the crisis in that it opened up new source of funds and tapped new creditors. This led to doubtful loans on the balance sheet at a time when the economy was on the downturn. Financial intermediaries had almost all their wiped out while the financial investors suffered losses.

My father has always been the figure that I look up to. He has always looked out for the family and has never let us down. But what I really admire about my father is that even if he was unable to finish high school, he was able to become a successful wholesaler and retailer.

In the future, I want to prove to myself that I can be something like my father. I want to be successful in my chosen craft like how successful he is in his. While I trust my skills and intellect that I can accomplish what my father has done, I believe I should get a degree from a reputable educational institution first. I chose to study accounting since I want to become skilled in business and accounting is the language of business. I must speak the language very well if I am to become a successful businessman in the future.

I chose to transfer to Seattle University because it is a school with a proven track record and a good reputation. I only want to get my diploma from the best. In line with its mission, I can become an empowered leader not just for my sake but also for the people around me. I will become a leader in my own right as a businessman. I will not study to become an employee. I will put up my own business and I will become my own employer. As a businessman, I can also employ people and nourish them to become good leaders and skilled businessmen themselves The education I will get at Seattle University will help me achieve this.

As a professional who is looking forward to establishing a fine career for myself, my education at McCombs School of Business is a critical move for me to make great difference in my life.  This is why I am looking forward to developing a career in accounting since it will afford me the chance to have the training to be competitive in the global economy.  This is the advantage that I feel I can get at this fine academic institution the training to be competitive in the global economy and at the same time the flexibility to be able to deal with the different cultures in the diverse business world.
I have developed an interest in accounting due to my background in this course.  After a thorough investigation and survey, I learned that there are several tasks that one must accomplish as an accountant.  It is simply not the preparation of financial statements or the logging of commercial transactions but also a lot of analysis.  Accountants need to be driven and must pay close attention to detail especially in computing cost benefit analysis for companies or even looking at the end book value addition of any merger or acquisition.  Aside from this, there is also the complicated task of ensuring that while the company remains profitable there is also a balance in sharing the earnings through the management of employee benefits.  All of these functions attracted me to the pursuit of masters accounting courses.
In the same vein, I feel that I have already possessed quite a few capabilities that are necessary for me to become successful in this field.  I am confident that my ability to operate and monitor basic accounting procedures has given me the much needed head-start in this field.  With my ability to work well with other people, I am sure that after a decent training of accounting in your prestigious graduate university, I will learn how business works and what drives business and profits in a company through the invaluable accounting knowledge that I will be able to gain.   Given my experiences and my inclinations in life, I feel that it is a career in accounting that will best suit my goals in life.

A. Introduction
There are many types of profit-sharing plans. Basic ones include cash, deferred, and combination plan options. However, these types can either be a traditional plan, social security integrated plan, age weighted plan or new comparability plan. Moreover, Solo K plans, 401(k) plans, and profit-sharing401(k) plans also exist. No matter the type of profit-sharing plan that an employer or employee chooses, each plan has its own rules and requirements when it comes to taxes. The purpose of this research is to discuss the taxation of profit sharing plans.
B. Assessment
1. An overview of profit sharing plans
Profit sharing plans have tax deductible employer contributions. The contributions and investment earnings have deferred taxes until they are withdrawn. Employers are obligated to include employees over the age of 21 in the plan that has at least 2 years of employment with them. In 2007, tax deductible contributions of 25 compensation, up to 225,000 or up to 45,000 for the employer and each eligible employee (Merrill Lynch Wealth Management, 2009, p. 2).
While the employee cannot contribute to his or her profit sharing plan, the employee may contribute loans to the plan. One of the benefits of having a business is that the employer can deduct employer contributions as a business expense. Those eligible can also opt to take a 50 nonrefundable income tax credit of the first 1,000 administrative and retirement education expense incurred in each of the first three years of the program (Merrill Lynch Wealth Management, 2009, p. 2).
All employers participating in the profit sharing plan and have over one participant in the plan, need IRS Form 5500 to file. If the employer has only one participant in the plan, they should file the form once the plans assets exceed 200,000. The plan can be vested. It can also have a vesting scheduled (Merrill Lynch Wealth Management, 2009, p. 3).
Vesting of the plan depends on the type of plan the employer selects. Each plan is either 100 vested or has a vesting schedule. In order to establish a profit sharing plan, the employer must adopt it by the end of the businesss fiscal year (Merrill Lynch Wealth Management, 2009, p. 3). Regardless of whether the employer has a small business or a large corporation or the employee works for a large or small company, profit sharing plans should be understood completely as tax deductions to not apply to everyone at the same time.
2. Basic profit sharing plans
Traditionally, there are three basic types of plans. In fact, they are cash, deferred, and combination plans. A cash plan has profit paid directly to the employee as cash, checks or stock. It is taxed as ordinary income. The deferred plan has delayed or deferred payments where the contributions go to the account that each individual employee has setup. Benefits-and any investment earnings accrued-are distributed at retirement, death, disability, and sometimes at separation from service and other events (6. Profit-Sharing Plans, n.d., Deferred plan, para. 1).
A combination plan allows the employee to defer all or a portion of the contribution allocated to the plan. Sections of the contribution that are deferred go directly into the employees account. It is tax free, along with other investment earnings, until it is ready to be withdrawn. The cash amount taken is immediately taxed as ordinary income. For tax purposes, the Internal Revenue Services (IRS) (sic) qualification of profit-sharing plans is restricted to deferred or combination plans (6. Profit-Sharing Plans, n.d., Combination plan, para. 1).
Profit sharing plans can receive preferential tax treatment, if they meet rules and requirements set forth by the Employee Retirement Income Security Act of 1974 (ERISA). The rules help employees rights be protected. Additionally, they provide assurance to employees that pension benefits will be there when they are ready to retire. This is guaranteed (6. Profit-Sharing Plans, n.d., Plan Qualification Rules, para. 1).
Moreover, The rules govern requirements for reporting and disclosure of plan information, fiduciary responsibilities, employee eligibility for plan participation, vesting of benefits, form of benefit payment, and funding (6. Profit-Sharing Plans, n.d., Plan Qualification Rules, para. 1). The plans must also meet Internal Revenue Code (IRC) requirements, sections 401(a) (4), 410(b), and 401(a) (26). Significantly, these IRS nondiscrimination rules are designed to insure that a plan does not discriminate in favor of highly compensated employees (6. Profit-Sharing Plans, n.d., Plan Qualification Rules, para. 1). In order to maximize the benefits of the contributions and minimize tax burdens, both the employer and employee should understand the features of these basic profit sharing plans.
3. Additional profit sharing plans
There are four other types of profit sharing plans. Consequently, they include the following The Traditional Plan, The Social Security Integrated Plan, The Age Weighted Plan, and The New Comparability Plan. These plans help employees benefit from their jobs by having money put away for retirement. In some cases, since a plan can also have immediate cash value, an employee is able to set aside money in an account for emergency purposes.
The Traditional Plan
Each traditional plan enables business owners to make discretionary retirement plan contributions on behalf of their employees. The premise behind these contributions was to provide rewards to the employees for their contribution to the profits of the company (Solo-k Retirement Group, 2005, p. 1). The plans are included in a percentage of eligible payroll deductibles. Employees cannot be taxed on the plan by the employer. Profit sharing plans have fourteen (14) features. These features include the following attributes
Only a business owner can establish a profit sharing plan.
The 2006 maximum employer contribution limit is 25 of eligible payroll.
The maximum allocation per participant is lesser of 44,000 or 100 of eligible compensation. Special calculations apply to sole proprietors and partnerships.
The interplay between the 25 of payroll deductibility of the profit sharing contribution and the maximum limit of the contribution of 44,000 or 100 of compensation per participant will cause the contributions to be substantially lower than that allowed.
Any type of company can adopt a profit sharing plan including non-profit businesses.
Company contributions are discretionary, flexible and can be changed from year to year.
The contributions can be made subject to profitability or not.
Profit sharing contributions are tax deductible.
Profit sharing plans may require vesting.
Loans and hardships withdrawals may be made available.
Company contributions are non-taxable when made for the employee and grow tax-deferred until removed.
Can be combined with a 401(k) plan.
Minimum distributions are required, but may be delayed until retirement.
Distributions are taxable and may be subject to penalty taxes when taken before age 59 (Solo-k Retirement Group, 2005, Traditional Plans, pp. 1-2).
The Social Security Integrated Plan
This plan can be allocated as a proportion of pay. A plan equal to 10 of pay means each participant receives 10 contribution of their pay. Another method deals with Social Security. Social Security is considered to be discriminatory and favors employees with compensation below the Social Security taxable wage base (94,500 in 2006) (Solo-k Retirement Group, 2005, p. 2). This represents a higher percentage of a lower paid employees compensation. It does not reflect the percentage of compensation from a higher-paid employee.
Nevertheless, The Internal Revenue Code and the Internal Revenue Services regulations permit the company to offset the effect of this discrimination against the higher paid employees by integrating the plan with Social Security (Solo-k Retirement Group, 2005, p. 2). Here is an example of how the plan works an upper management person earning 150,000 per year is able to allocate 10.6 or 15,849 from pay to the plan. Yet, an employee who earns only 30,000 per year can only allocate 7.2 or 2,151 of pay to the plan. Since the compensation amount is significant, so is the percentage that can be allocated to the profit sharing plan (Solo-k Retirement Group, 2005, p. 2). An employee who does not think this is fair should also consider the tax bracket a person earning 150,000 is in versus the low tax bracket of someone with 30,000 worth of earnings per year.
The Age Weighted Plan
The formula for the plan was part of the evolution process of profit sharing plans. It is Based on the principle used to fund a defined-benefit plan, a higher allocation percentage can be contributed on behalf of an older participant to compensate for the fact that the contributions made on his behalf will have less years to accumulate investment earnings to retirement than the contributors made for a younger participant (Solo-k Retirement Group, 2005, p. 3). An example is a 65 year old retiring at normal time and the plan has two participants. One person is 55 and the other 35.
Contributions for the 65 year old is based on 65-35 or 30 year period of funding. The contribution for the 35 year old is based on 65-35 or 30 year period of funding. Without considering interest the burden for the 55 year old to contribute to his retirement is 3 times greater (3010) than that of the 35 year old to achieve the same outcome. Nevertheless, investment earnings can be discounted and interest can be compounded (Solo-k Retirement Group, 2005, p. 3). However, these components of the plan are taxable.
The New Comparability Plan
The remaining profit sharing plan is comparability one. On October 20, 2005, the IRS announced the 2006-dollar limits on compensation and benefits for qualified retirement plans and the new Social Security Taxable Wage Base (Solo-k Retirement Group, 2005, p. 3). The owners may think it is unrealistic or perhaps they do not fully understand the benefits and features. Whatever the case, the comparability plan was designed to ease the tax burdens of the small business owner.
The older employees have a higher cost of contributing a 1 benefit per month when they reach age 65 than the 25 year old employee. Using actuarial assumptions permissible under the 401 (a) (4) regulation, the cost of providing a benefit of 100 per month payable at age 65 is 4,200 for a 55-year-old compared to 363 for a 25-year-old (Solo-k Retirement Group, 2005, p. 3). With both employees earning the same compensation per year, the plan would earn the 55-year-old a 4,200 profit sharing contribution. Due to the actuarial assumptions of 401 (a) (4) this can be considered equal to the 25-year-olds 363 contribution (Solo-k Retirement Group, 2005, p. 3).
3. Solo K Plan
Some employees may choose to put their money in a 401(k) retirement plan. It is sometimes called the solo k retirement plan. A Solo K retirement plan is a flexible and easy way to maximize retirement savings to benefit the (sic) small, single-owner businesses (Knight, 2005, p. 54). This is the type of plan that increases the value of a 401(k) plan. In fact, it enables business owners to increase their contributions. For example, the contribution amount for 2004 was 13,000 for those under the age of 50. If the person was 51 or older, the contribution amount was 16,000. This plan is significant because business owners are able to pay themselves a tax-deductible profit-sharing portion based on net earnings. Solo K plans allow a contribution of up to 20 of modified net profit (net profit minus one-half of the self-employment tax) (Knight, 2005, p. 54).
Solo K plans are very beneficial to business owners in many ways. First, the owners can contribute large amounts to their plans. In 2004, someone that was self-employed could contribute 19,717 if they were over the age of 50. This is interesting because all the individual had to do was net 20,000 worth of income (Knight, 2005, p. 54).
Another benefit of the plan is the person has access to tax-free loans. Loans are not permitted with traditional or Roth IRAs and SEP IRAs (Knight, 2005, p. 54). However, other benefits include, low administrative costs, convenient contribution amounts, and option to consolidate existing plans. Yet, it should be noted that Solo K plans are not for everyone (Knight, 2005, p. 54).
4. Taxation on a self-employed 401(k) plan
Many types of 401(k) plans exist. For the self-employed, this type of plan is good. As of the end of 2001, the 2001 Tax Act maximized the profit-sharing401(k) plan deduction limit for employer contributions from 15 of compensation to 25 of compensation, effective for tax years beginning after December 31, 2001 (Geller, 2002, p. 60). Those earning over 160,000 per year in 2002, receive a deductible contribution of 40,000 from a profit-sharing401(k) plan. Income earnings lesser than 160,000, can take a 25 deductible of their earnings. A business owner with 100,000 can deduct 25,000 from this profit-sharing plan or a money purchase plan. However, they can deduct 36,000 or 36 compensation under a profit-sharing401(k) plan (Geller, 2002, p. 60). The difference is that more opportunities and benefits exist for the combination profit-sharing401(k) plan than they do for a normal profit-sharing plan or regular 401(k) plan.
5. The benefits of a 401(k) profit-sharing plan
Sole proprietors, sole practitioners, owners of single-employee corporations, and limited liability corporations (LLC) can benefit from this type of retirement plan. It is a result of the 2001 Economic Growth and Tax Relief Reconciliation Act (Kozol, 2005, p. 48). This plan enables more tax credits for the small business owner. It is designed for those earning lesser than 210,000 per year. The plan also allows owners to borrow against retirement in the form of a loan which of course, is not taxed. A third benefit is the ability to acquire life insurance, which means that the proprietor can purchase life insurance using retirement plan accumulations (Kozol, 2005, p. 48).
This factor is important because sometimes circumstances beyond the owners control occur (such as bad weather). Insurance enables the owner to recover some of the financial loss when a catastrophe occurs. However, the owner should be aware that the amount of insurance he or she can purchase is limited by the Tax Code. Of course, the plan has to also be a qualified for the participant to be eligible to acquire insurance coverage. In case of an IRC 401(k)-profit-sharing plan, the law allows a plan to use up to 25 of the allocable contributions as a premium for life insurance on behalf of the participant (Kozol, 2005, p. 49).
Again, this type of plan is not like the SEP or SIMPLE IRA. Nevertheless, the business owner can choose to utilize a 401(k) combination and roll money over to the SEP or SIMPLE IRA funds. A venture such as this enables the business owner to utilize old money to purchase life insurance. It also presents an opportunity for utilization of retirement funds for investment purposes into estate liquidity objectives (Kozol, 2005, p. 49).
C. Conclusion
Not all profit-sharing plans are alike. In fact, neither are they all equal in contribution opportunities. Thus, both the employer and the employee should understand what each plan has to offer. As the business owner, the employer should consider those plans which maximize their contributions, reduce tax liabilities, and provide access to loans that can be used to fund the business or purchase insurance. Consequently, those plans providing profit-sharing401(k) combinations are most reasonable for the employee.
From an employee perspective, the employee must consider the plans which enable them to have cash on hand to withdraw from emergencies, allow the option to borrow money, and offer a large contribution opportunity even if he or she is over the age of 55 and near retirement. The employee should also be careful in choosing the plan that allows taxes to be deferred until the money is withdrawn versus ones that immediately tax the plans contributions as ordinary income. As a result, those plans that offer combination features may best suit the employee.

The consolidated financial statements of Hitachi Limited have been prepared in accordance with US GAAP due to the fact that it has an ADR listing on the NYSE and hence this may point to a listing requirement that results be presented in an understandable and recognized manner, that is, in accordance with US GAAP (Annual Report, 2009). Additionally, borrowings have also been done abroad in foreign currencies. Lastly, while the companys principal office is located in Japan, the company has an international exposure with a number of subsidiaries, associates, joint ventures and variable interest entities the world (Annual Report, 2009).
These three facts point to an international capital base, together with an international base for employees, customers, suppliers and other stakeholders. In this regard, it makes sense to prepare the consolidated financial statements in accordance with a widely recognized and understood accounting framework, rather than the more localized Japanese alternative. It is also possible that Japanese law allows such deviation on the basis of finding more international relevance for reported results of Japanese multinational corporations.
Task Two
Depreciation is in essence accounting for the usage of fixed assets over time and the fall in value that occurs with them. In essence it is a fund setting aside strategy for future asset replacement and for revealing the true income generating capacity of the assets on the balance sheet. With regard to depreciation of property, plant and equipment, the US GAAP and IFRS have certain similarities and differences. Both set of standards call for
Property, Plant  Equipment to be depreciated in a systematic way over their useful lives.
No Specific method is required under either set of standards.
The Depreciation charge is to be deducted from profit and loss under both set of standards.
Changes in useful life, residual value, depreciation method and any other asset specific changes to be accounted for prospectively as changes in estimates under both IFRS and US GAAP. However, greater disclosure requirements exist in US GAAP for changes in depreciation method when compared with those under IFRS.
Subsequent expenditure on any asset is capitalized if it can be ascertained whether future benefits will flow to the entity.
Any routine service charge expensed.
On to the differences, and we see that
whereas IFRS calls for reviewing all estimates and method used on the each reporting date, the US GAAP requires a review of all estimates and method used whenever events or changes in circumstances indicate current estimates may not be appropriate.
Whereas component depreciation is required in IFRS, US GAAP does not require it but allows its usage.
Inventory includes a companys stock of goods for use in the manufacturing process or for resale.  A variety of inventory costing methodologies are  permitted under US GAAP including LIFO, FIFO andor weighted average cost. US Income tax rules require that companies that use LIFO for tax purposes also use it for book accounting  reporting purposes. On the other hand, IFRS permits the use of a number of costing methodologies although LIFO is explicitly prohibited. Conversely, IFRS allows reversal of inventory write downs to the original amount of the write down itself as the same are required for subsequent recoveries. The US GAAP explicitly prohibits any such reversals (PWC, 2009).
Task Three
Note 13 of the note to the financial statements of the company state that the  Japanese company law provides that earnings in an amount equal to 10 percent of appropriations of retained earnings to be paid as dividends should be appropriated as a capital surplus or legal reserve until the total of capital surplus and legal reserves equals 25 percent of the stated common stock. In addition to transfer from capital surplus to stated common stock, either capital surplus or legal reserve may be available for dividends by resolution of the shareholders meeting  (Annual Report P. 70, 2009).
This basically implies that by law, Japanese companies are required to build up equity reserves and not keep distributing profits as dividends as this acts as a buffer in case of the company going into financial trouble. A good equity base, which is increased over time, is a risk mitigating factor and points to a sustained effort at a long life of Japanese corporations. Under this arrangement, 10 of the dividend payment should be retained as a legal reserve until and unless these legal reserves reach a level of 25 of the common equity of the company.
Do note that the local company laws supersede US GAAP and IFRS across the globe and while this practice is a legal requirement and is not covered by either set of accounting standards, the practice is not in contravention of them.
Task Four
 The public company accounting oversight board is a private sector, non profit corporation, created by the Sarbanes-Oxley Act of 2002, to oversee the auditors of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, fair and independent audit reports  (PCAOB website, 2009). More specifically, following the collapse of Enron and WorldCom and the negligence exhibited by auditors in both these cases, not to mention the malpractices employed by Arthur Anderson in the case of Enrons audit over the course of several years, a dire need was felt in academic, professional and government circles for more investor protection. The Sarbanes-Oxley act is in essence a fall out of this investor shock witnessed by financial markets in the United States which called for a new corporate governance framework, making financial reporting more revealing and also supervising auditors of public companies so that the loop holes that led to billions of dollars in investor losses and the confidence fall out that occurred does not happen again and investors are provided with enough reliable tools to measure the performance of their agent, that is management and auditors.

Task Five
Ernst  Young ShinNihon LLC, members of Ernst  Young Global, are auditors of the company. Reference is made to the Public Company Accounting Oversight Board by the auditors due to the fact that these consolidated financial statements will be made available to the US investors by virtue of the companys ADR listing on the NYSE and hence the auditors are liable under the Sarbanes Oxley Act 2002 to have their work and their effectiveness at doing their work overseen and scrutinized by the  Public Company Accounting Oversight Board.
Task Six
The auditors of the company have qualified their opinion on the consolidated financial statements of the company for the year ended 31 March 2009 citing the lack of segment reporting as a reason. Bear in mind that Hitachi operates through a number of geographic and product segments. The drive towards more revealing and informative financial statements entails that where available and applicable, all information should be provided to readers of financial statements to help them make informed investment decisions.
Task Seven
The commercialization of Japan has historically happened under the leadership of European colonial powers before World War II and then the United States of America following the defeat of Japan at the hands of the Allied powers and occupation by Allied Forces until a vibrant democratic system was established together with proper capital market system and standards for conduct of public companies including company and business law. From a historical perspective, hence, Japanese corporations are heavily influenced by Western elements esp that of the United States for their intellectual input in Japans post war transformation into an economic power (Watson, 1974).
Additionally, from an environmental perspective, the use of US GAAP is an influence by Hitachi due to their reliance on capital markets in the United States ever since 1945. Do note that following the end of the second world war, Japan and America became major trading partners as Japan came to become the largest exporting nation after Germany esp in electronics and cars (the Unites States on the other hand became a heavy importer of cars and electronics due to higher affluence). Hence, the intellectual connection between the two countries deepened leading to higher reliance on US funding and hence reference to the Public Company Accounting Oversight Board (Watson, 1974).
Lastly, from a cultural perspective, Japanese are conservative people and although they appreciate the drive for more informative and revealing financial statements, segmental reporting does seem to be too much of an extra step for them at the moment, that is, they do not accept change so easily and fast (Watson, 1974).

Executive Summary
A financial analysis of Madison Stores Limited is conducted in this report by focusing mainly on the profitability and efficiency, liquidity and financial stability of the organization.  Such analysis is conducted with particular attention to the information needs of shareholders (return and investment risk) and creditors (liquidity and going concern).  From such an analysis a good profitability and efficiency were noted.  However a weak liquidity and financial stability are outlined, which increase considerably the risks of the company and decrease the viability of investing and providing credit terms to the firm.

Introduction  Myer Holdings Limited
Myer Holdings is Australias largest department store group that has operated for over 100 years in such industry.  The group offers over 600,000 product lines encompassing 2,400 brands from over 800 international suppliers across the globe.  In this business support, the financial health of Madison Stores, a subsidiary of Myer Holdings will be conducted to provide financial information to aid a potential shareholder and creditor in their economic decisions.
A shareholder is interested in two basic elements, which encompass the return derived from the investment and the risks pertinent to such investment.  Returns from an equity investor take the direct form of dividends and the indirect form of capital appreciation leading to capital gains if the equity is sold in the stock market.  Therefore, the shareholder is interested in the profitability and growth of the organization.  As regards the risk element question, the financial position and stability of the firm should be examined.  Such elements outline the working capital management, cash management and capital structure of the firm, all of which portray the going concern potential of the organization.
A creditor is mainly interested in timely payments from the customer.  In this respect, in order to answer such a question attention is more devoted towards the liquidity and cash flow of the company.  Risk is also evaluated by a creditor and thus the going concern of the organization will be assessed in a similar manner like the shareholder noted above.
Financial Analysis of Madison Stores Limited
Two techniques will be adopted to assess the financial health of Madison Stores and answer the questions requested by the shareholder and creditor noted above.  These techniques entail a horizontal and vertical analysis.  A horizontal analysis comprises the percentage changes in key variables over a specific time frame to identify any trends.  The computations pertinent to such an analysis are portrayed in Appendix A of this paper.  A vertical analysis, also known as ratio analysis is also conducted in Appendix B.  By entwining such techniques one can further enhance and support the arguments pertinent to the firms financial health.
A financial health of an organization is normally classified into three main sections, being profitability, liquidity and financial stability.  In this respect, the proceeding financial analysis will be conducted in line with the aforesaid common practice.
Profitability and Efficiency

The horizontal analysis portrayed in graphical form above indicates an upward trend for the profitability items of the firm.  Indeed, both the revenue and profit elements increased from 2008 to 2009.  This immediately hints improvement in the profitability of the organization, which means better returns for the potential shareholder.  The accounting ratios outlined in Appendix B can be useful to pinpoint the key elements leading to such a trend.
The gross profit margin and net profit margin of Madison Stores outline the gross profit and net profit generated from every 100 of sales.  The gross profit margin declined, which means that lower gross profit is being made from the sales revenue.  Such a decline is due to a decrease in cost efficiency in terms of the direct costs of the organization.  Indeed, the cost of sales increased by 38.76 during the period examined, which is much higher than the rise in sales of 26.10 outlined in Appendix A. With respect to the net profit margin an increase was noted.  By referring again to the horizontal analysis conducted below, one can note that this stems from a decrease in operating costs of 7.04 and a decrease in taxation of 4.85.  Thus, management should be applauded for their cost efficiency in operating costs.
When one examines the profitability of the organization, consideration should also be given to the utilization of resources.  The asset turnover is applied, which highlights the effectiveness of total assets to generate revenue.  This ratio remained fairly stable during the years.  This portrays that the companys effectiveness in utilizing its resources to generate profits remained fairly unchanged.  The return on assets is also computed, which outlines the ability of assets to generate income.  Its increase means that management was more effective in profit generation from resources.
The effect of the improving profitability noted above is also reflected in the return on equity ratio, which outlines the return that equity investors attain.  This is a favorable element for the company in the stock market, which may portray a rise in the price of stocks.
Liquidity
A general overview of the working capital management of the company is attained from the current ratio.  The current ratio outlines the ability of current assets to cover current liabilities.  A declining trend is portrayed which immediately outline poor working capital management.  It is viable to investigate further the current assets and current liabilities of the organization in order to shed further light on its liquidity, because as already noted the aforesaid ratio provide a generic view.  A very important element of the firms current assets is cash.  The cash of the company declined by 19.37.  This is also a negative element on the firms liquidity.  Despite such a drop the cash flow ratio of the firm increased, which is in line with the increase in net cash from operating activities.  An examination of the cash flow statement further clarifies such conflicting figures by outline that the decline in cash is due to further investments and repayment of debts. 
As regards the management of inventory outlined by the inventory turnover, an increase in such ratio is noted.  This means that the stock management of the company improved.  Better stock management is good for both the companys liquidity and profitability by enabling more cash available and reducing the risk of obsolete inventory.
The accounts receivable turnover decreased, which means that the credit control department is taking more time to collect money from debtors.  Indeed, the debtors collection period computed in Appendix B, shows an increase of 48 days.  Such ineffectiveness should be solved, because it is limiting the cash potential of the company.
On the contrary, the accounts payable turnover increased, which implies that less time is taken to pay creditors.  This is sustained by the decline in creditors payment period of 47 days computed in Appendix B.  A serious concern is raised when one compares the creditors payment period of 324 days with the debtors collection period of 343 days.  This is due to the fact that payments to creditors are being made before money is collected from trade debtors.  Such element further strains the cash flow of the company and is a serious matter that the potential creditor should consider.
Financial Stability
The debt of the company is diminishing in relation to total assets and equity as outlined by the debt asset and debt equity ratios.  This means that the risks of financial failure of the firm are declining due to lower interest commitments.  Indeed, non-current liabilities diminished by 8.86.  However, the interest charges increased by 176.03 during the years.  This is due that a significant portion of long-term debts will be paid next year, which are classified as current liabilities this year.  In fact the short-term interest bearing liabilities increased by 81.09.   Thus the benefit of lower interest due to lower debts will be gained next year.
The ability of operating profit to cover interest charges declined as shown by the fall in times interest earned.  Even the ability of cash to cover interest commitments diminished as noted by the fall in the cash interest coverage.  Hence, one can contend that the financial stability of the company is declining, hindering its going concern potential, which is an important element for shareholders and creditors as noted at the beginning of this paper.
Limitations of Financial Analysis
The financial analysis conducted in this paper, relies only on financial figures and neglects qualitative elements.  It is important that both the shareholder and creditor meticulously consider qualitative elements that also affect the organisation.  Such elements can take different forms, like customer perspective, innovation element in firm and future plans, which considerably affect the organization and may alter the decision.
Recommendation
A good profitability was noted, which outlines sustained going concern and good returns for shareholders.  This is a positive element for both interested users.  Declining working capital management and ineffective credit control were noted that put a strain on the firms cash flow.  These factors shake the going concern of the firm and the ability for the company to meet debt obligations on a timely basis.  This is an important element for the creditor.  A weak financial stability was noted that further raises concerns about the going concern of the organization.  Therefore, one can contend that this is a risky investment for the shareholder and it is thus advisable that heshe opts for other investments.  Likewise, considerable risks are noted for the creditor especially the cash concern, which diminishes the likelihood of accepting such business preposition.  However, as outlined in the previous section it is important that qualitative features are considered before taking a decision in order to see a complete picture of the company.