1. 1 Lovely Professional University Lecture 1. U.S. Accounting and Tax System Howard Godfrey, Ph.D., CPA Professor of Accounting Copyright © 2010 Edited June 24, 2010

2. Let me add my word of welcome to UNC Charlotte, Charlotte, and the U.S. I hope you are enjoying your stay here and having a very productive learning experience. I hope these two presentations will be valuable for you in understanding: 1. Our accounting and tax system, and 2. Results of some of our research on multi-national tax planning practices. 2

3. 3 After discussing some basic items, I will address two questions that were asked during your welcome reception a few weeks ago. 1.How do accounting principles in the U.S. compare to principles used in India? 2.How heavily are we taxed in this country (by federal government, state, county, and city)?

4. Assume, you moved to Charlotte to start a new business that sells products made by your family business in India. If you want to start a corporation here, what steps will you take? [Charter] Partnership? LLC? Suppose you buy U.S. property to be owned by your family business in India and the U.S. business is also owned by the family business in India. [Authority] 4

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10. Accounting Principles. Do you note the important accounting principles applicable to the accounts shaded in yellow on the preceding page? 1. Sales (Sold $1,000,000, collected $960,000) Ending receivables: $40,000. Collectible? 2. Cost of sales (Bought inventory for $600,000, sold inventory with a cost of $520,000. Ending inventory has a cost of $80,000) 3. Depreciation Expense. We assumed the building will have a useful life of 40 years when computing depreciation. Tax methods. 10

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14. How does the balance sheet shown on the preceding slide compare with the financial statements you are accustomed to preparing or analyzing in India? 14

15. Do you compute a current ratio? Capital structure? Debt Ratio? Comment on cash flow in 2008. 15

16. 16 Atul Ltd Headquartered in Atul, Gujarat Present in China, Germany, the UK and the USA through subsidiary companies

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24. Please compute income tax that your corporation will pay to the U.S. and to North Carolina, based on net income of $100,000. 24

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29. How much state franchise tax will be paid? 29

30. Suppose you operate the business as a Limited Liability Company, or as a proprietorship. How much income tax will be paid to NC & IRS? Approximate amount 30

31. Suppose you receive a salary of $60,000 from the corporation and you are the only employee. How much FICA is withheld? How much FICA is paid to the IRS by the corporation? 31

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34. What other taxes will the corporation pay? 1.Sales taxes 2.Unemployment taxes 3.Property taxes 4.Gasoline taxes Make a list and compute total taxes the corporation will pay. 34

35. Now, lets look at the taxation of the U.S. Overall, each year the government collects (or borrows) over $10,000 for each person, although some is actually collected from businesses, etc. 35

36. 2010 budget of about $3.7 trillion for a country of about 310 million people. 36

37. Federal ($billions)-2009 Individual income tax$915 Corporate income tax138 Social Security Tax654 Medicare191 Other?? Total2,105 Also borrowing!!!!!1,413 37

38. North Carolina ($millions) Income tax (Indiv & Corp)$11,184 Sales tax5,038 Other2,353 Total18,576 38

39. Meck. County ($millions) Property tax - Current$819 Property tax – Prior17 Sales Tax132 Other10 Investment income7 Total$986 Population 39

40. City of Charlotte - Total FY2010 Budget $1.87 billion –Operating Budget $1.06 billion –Capital Budget $803.9 million

41. CharlottePercent Property tax63.5% Sales Tax12.9% Fees10.9% Etc. Population 41

42. Currency Issues 42

43. In a global economy, with transactions across borders, it is necessary to deal with currency issues. The next few slides deal with ATUL, Ltd. located in the Charlotte area that is owned by a company in India. 43

44. ATUL indicates in its annual report that it has been hurt by the declining dollar and it translates financial statements of subsidiaries in 4 other countries into rupee. 44

45. Lets use the next few slides to discuss some global finance issues related to currency. We will also look at the policies used by HP and IBM when translating financial statements that have been prepared in foreign currencies. 45

46. Atul Annual Report In a challenging business environment in 2007-08… The US dollar depreciated around 12% against the Indian rupee What does that mean? See example of transaction on next 2 slides (with exchange rates changing). 46

47. 47 Atul- Accounting Policies 7 Foreign Currency Transaction: 7.1 Initial Recognition: Transactions denominated in foreign currencies are recorded at the rate prevailing on the date of the transaction.

48. 48 Atul- Accounting Policies 7 Foreign Currency Transaction: 7.2 Conversion: At the year-end, monetary items denominated in foreign currencies..are converted into rupee equivalents at the year-end exchange rates. Non monetary items which are carried at historical cost denominated in a foreign currency are reported using the exchange rate at date of transaction.

49. 49 Atul- Accounting Policies 7 Foreign Currency Transaction: 7.3 Exchange Differences: All exchange differences arising on settlement and conversion of foreign currency transactions are included in the profit & loss account, except where they relate to the acquisition of fixed assets, acquired out of India in which case they are adjusted in the cost of the corresponding asset.

50. 50 Impact of Exchange Rates on Income 1.On 6-1-09, a U.S. corp. sold its product to a Hong Kong co. for $400,000HKD, 2.On 6-1-09, exchange rate was $8HKD to $1USD. 3.Hong Kong co. will pay later in Hong Kong currency. 4.Later when U.S. corp. receives payment, exchange rate is $10HKD to $1USD. 5.What is the gain or loss for the U.S. corp. as a result of these transactions?

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52. 52 Atul Ltd Present in China, Germany, the UK and the USA through subsidiary companies. Atul must translate financial statements in 4 other currencies to the Indian rupee

53. The next slide has financial statements for a hypothetical company. 53

57. IBM. 2008 Annual Report. Translation of Non- U.S. currency amounts reported by Subsidiaries. Assets and liabilities of non-U.S. subsidiaries that have a local functional currency are translated to U.S. dollars at year-end exchange rates. Translation adjustments are recorded in accumulated gains and (losses) not affecting retained earnings in the Consolidated Statement of Stockholders’ Equity. Income and expense items are translated at weighted-average rates of exchange prevailing during the year.

58. HP-We are exposed to foreign currency exchange rate risk inherent in our sales commitments, anticipated sales, anticipated purchases and assets, liabilities and debt denominated in currencies other than the U.S. dollar. We transact business in approximately 40 currencies worldwide, of which the most significant to our operations for fiscal 2008 were the euro, the Japanese yen and the British pound.

59. (HP) Dear Fellow Stockholders, Fiscal 2008 was a strong year with some notable accomplishments. … Fiscal 2008 was also a difficult year... HP proved our ability to execute in a tough environment. In 2008, HP delivered: Net revenue growth of 13 percent, or 8 percent in constant currency, to $118.4 billion

60. Foreign Currency Transactions HP uses U.S. dollar predominately as functional currency. Assets and liabilities denominated in non-U.S. dollars are remeasured into U.S. dollars 1. at current exchange rates for monetary assets and liabilities, and 2. historical exchange rates for nonmonetary assets and liabilities. Net revenue, cost of sales and expenses are remeasured at average exchange rates in effect during each period, except for those net revenue, cost of sales and expenses related to the previously noted balance sheet amounts, which HP remeasures at historical exchange rates. HP includes gains or losses from foreign currency remeasurement in net earnings.

61. 61 Summary-Impact of changes in exchange rates. If you use different exchange rates for different accounts on the balance sheet, you put the report out of balance. How you view the subsidiary (extension of parent, or a very separate company) determines how you translate foreign statements.

62. 62 Atul Ltd – Annual Report The net exchange difference resulting from the translation of items in financial statement of the subsidiaries is recognised as income or expense under the head "Exchange difference on translation of foreign subsidiaries."

63. 63 The End