Question 1

You are preparing a tax return and note that your client received several 1099-Bs, Proceeds from Broker and Barter Exchange Transactions. Unfortunately, the brokerage statements that your client provided do not identify the cost basis for the stock that was sold. Your client received proceeds of $875,000 from the sale of 40 different stocks that were purchased over 20 years, received as gifts or inherited. What will you do to prepare an accurate tax return? What questions will you ask your client?

Assume that your client says that the cost basis, to the best of her knowledge, is equal to the proceeds of the sale. How will that impact how you prepare Schedule D?

What ethical issues do you, as a tax preparer, have to deal with?

Espond to this... There is no question that as a tax preparer it is essential to prepare the most accurate and integral return for every client. In this situation the issue comes into play regarding the original costs of the stocks that were purchased. Since the client received proceeds of 875k a "cost basis" amount must be established when recognizing a capital gain or loss.

Unfortunately my client feels that the "cost basis" is equal to the proceeds. This is a huge red flag right away. No stock over 20 yearswill have stayed the same, they either gain or lose value and the original purchase price of the asset must be documented.

To get more information I would first start to ask my client who gave her the stocks, I would then try and find out if any records were kept.Ultimately I would have to contact certain organizations who initially issued these stocks under the given names from the client. I also may be able to look up records of price per share when the stocks were issued to get a ball park idea.The goal is to make the best effort to get the correct cost basis on all stocks that were issued.

In this situation no cost basis amounts were provided so it is up to me and the client to gather what we feel is correct cost basis information. Usually 1099 B's are accurate relating to proceed amounts however some organizations may make mistakes so they can be questioned if the financial data does not match. In this case I would also make sure that the 875k is accurate and then work to get cost basis stock sale price when the stocks were originally sold next.

The goal is to always perform exceptional due diligence while letting the client know the legal issues that can happen due to gross negligence or knowingly admitting incorrect financial data. In this case the schedule D is pretty straightforward. Essentially you account for your proceeds and deduct your cost basis (initial cost of asset) and then take the difference which is calculated as a gain or loss. I would follow up by stating the importance of our ethical stance on preparing taxes and why it is so important to make sure we find out what the original stocks were sold at to ensure an accurate tax filing

Question 2

Read the following scenario and use the information to help you answer the discussion questions that follow:

Scenario:

You work for a large company in which the CEO is not entirely involved in the day-to-day workings of the financial department. As the CEO is walking through your department, he sees you working on a Statement of Cash Flows. Intrigued, he asks "what's that you're working on?"

Now, you are well aware of the importance and use of the SOCF within the business world. You are presented with the unique opportunity in explaining this to your boss. What key points would you address with the CEO? What makes those points so important? Explain.

Respond to this... I would tell the CEO that i was working on the statement of cash flows. I would tell him that were are working on the statement to see what our companies cash flow is fro operations. I would state that this is very important so we can determine if the company is generating cash from its normal business operations. SOme time a company can be making money on the income statements, but if receivable are growing the company could be in a bad position for two reasons. They might run low on cash or as receivables grow there is more and more of a chance for bad debt to develop.

Also if the company as lines of credit or other ways to increase its debt it is good to know if the company is using cash to reduce debt or if it is borrowing to stay afloat.

Question 3

How do sensitivity analysis, scenario analysis, decision tree analysis, and computer simulations assist in making the financial investment decisions? How do these relate to our primary financial investment decision tool of NPV?

Respond to this... When it comes to making financial investments decisions, companies utilize analyses tools to help determine if they should accept or reject a project. Since analyses result in estimates, sensitivity analysis looks at the margin of error in estimates. This analysis uses "what if" questions to see how much estimates change. Scenario analysis looks at how the output variables are affected by changing one input variable at a time. This analysis looks at scenarios that deviate from the base scenario. It can be helpful to the decision making process by analyzing both the best and worst case scenarios. Decision tree analysis looks at the process in stages for which projects occur. This can identify where and when risk will occur. Computer simulations help to easily look at several different outcomes, similar to scenario analysis. However, with the use of computer simulation, there is more flexibility and the opportunity to look at many more possibilities. These methods relate to NPV because they are all useful when making investment decisions. NPV is a useful method because it provides numbers for comparisons of the initial cash outlay to the present value of the return. Each method has its own unique advantage, but all offer varying valuable data for investment decision making.

References

Damodaran, A. (2015). Applied Corporate Finance (4th ed.). Hoboken: John Wiley & Sons, Inc.