Finance Operations Cima Study Notes

Topics: Balance sheet, Generally Accepted Accounting Principles, Depreciation Pages: 38 (5092 words) Published: June 24, 2013
Financial Operations

Principles of Business Taxation

UK & USA is based on a benchmark tax regime
Government needs tax to finance expenditure on public services and Gov borrowing

Government uses tax to both stimulate and control the economy.

Adam Smith’s Wealth of Nations

Good Tax should be;


3 Major principles of any good tax policy

3 E’s

Economic Effect

American Institute of Certified Public Accountants – 10 Principles

Appropriate Gov Revenues
Minimum Tax Gap
Economic Growth and Efficiency
Transparency and Visibility
Economy of Collection
Convenience of Payment
Equality and Fairness

2 Types of Tax

Directs – income tax, corporation tax etc
Indirect – VAT

Incidence – the distribution of the tax burden has 2 elements
Formal – the person who pays they tax
Actual – the person who bares the cost

Competent Jurisdiction – Tax authority that has the legal power to assess and collect tax

Hypothecation – Taxes devoted to certain types of expenditure – ie road tax to spending on roads and transport

Tax Gap – the difference between what’s collected and what’s actually owed.

Tax rate structure

Progressive – increases in proportion as amount of income rises Proportional – same proportion as income rises
Regressive – Decreasing proportion as income rises

Sources of Tax Rules

Agreements between countries – ie double tax treaties

Taxes are classified according to their tax base – what’s being taxed.

Trading Income – Tax Base = Profit

Standard Proforma
Accounting Profit X
- Income exempt from tax, or taxed under other rules(X)
+ Disallowable expenses X
+ Depreciation X
- Tax Depreciation (capital allowance)(X)
= Taxable Profit X

Income exempt = income not relating to the main trading activity of the organization i.e. rental income, dividends received, interest received or due.

Capital Allowance

When looking at assets must look at the tax allowances as apposed to standard depreciation – the rates run differently so….

Asset Disposal

Proceeds from disposal X
- Carrying amount of asset(X)
= Accounting Profit/(Loss) X

Accounting profit or loss is a disallowable expense as it is taxed under different rules so profit is deducted from accounting profit and loss is added back to accounting profit, and then the figures are replaced by a balancing charge or allowance.

Proceeds X
- Tax written down (TWDV)(X)
= Balancing Charge/(allowance) X

Capital Taxes - Tax base = Assets

Standard Proforma

Proceeds X
- Cost to Sell(X)
= Net Proceeds X
- Cost of Original Asset(X)
- Cost to Buy(X)
- Enhancement costs(X)
- Indexation Allowance(X)
= Chargeable Gain X


Business Cost
50,000 + Legal Costs 1,500 2/00
Sold for 150,000, selling costs = 2,000 11/11
Extension = 12,000 in 4/02, roof repairs = 5000 in 6/03
Indexation factors
2/00 to 11/11 = 30%
4/02 to 11/11 = 20%
6/03 to 11/11 = 10%
Capital Gains tax = 30%


Proceeds 150,000
- Cost to Sell (2,000)
= Net Proceeds 148,000

Cost of Original Asset50,000
- Costs to Buy (1,500)
- Enhancement Cost(12,000)

Indexation Adj

Purchase (50,000 + 1,500)*30% (15,450)
Enhancement (12,000)*20% ( 2,400)

Chargable Gain 66,650

Capital gains tax = 66,650 * 30%19,995

Roof repairs are not capital expense as this is not an enhancement or new purchase, but repairs to an existing structure.

Taxing of Dividends

Classical System

Profits X Tax rate = Tax 100,000 * 15%15,000
Net Div X Income Tax = Tax 42,500 * 20% 8,500
Total Tax23,500

Dividends here are double taxed both as co profits...
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