Question

General Question: What would your three recommendations be for a company that had a loss of net income?

- Pros & Cons of those strategies

- Out of the three, which one would highly benefit that company?

Answer 1

Answer:

Net Loss- It appears in the Inome statement when Expenses are more than Income of the company for a given period of time.

Recommendations- Are as following:

Depreciation- It is the continuous reduction in the asset's value. It is non cash expense that reduces Net Income or increases the Net loss but depreciation does not involve any payment of cash. Company can reduce the depreciation amount because no cash is being paid to prevent from Net Loss.

Pros- This will reduce the Net loss or increase the net income.

Cons- Depreciation is a non cash expense but it is very important to have in income statement because it shows the use of assets over the period of time.

Taxes and other expenditures- Heavy taxes reduce the amount of profit or results in Net Loss. Company should timely pay the taxes so that it may not be pending and may not affect the Income statement of specific year. Company should develop a budget that includes each year's tax payment in the budget. Company should also reduce the unnecessary or excess expenditures to avoid Net loss.

Pros- This method reduces the Net loss or increases net income.

Cons- Taxation cannot be avoided, tax evasion is illegal. Company has to pay taxes on time to prevent from any penalty.

Carry forward of losses- This is an accounting strategy that is applied on current year's net operating loss. Net loss of current year should be taken to the next year's income statement and should be adjusted to the net income of next years to reduce the tax liability. This will result in lower taxation.

Conclusion- I will highly recommend the Carry forward of losses because this reduces loss on a single year income statement and the tax liability also. Net operating loss carry forward is recorded as Asset on the company's general ledger because it reduces future tax liability. A deferred tax asset account is created, maximum 80% of net income in any year can be used. A business can carry forward the loss for 20 years.