1. What are the differences between trading securities, Held to Maturity Securities and Available for Sale securities? Can you give examples of each?
2. As an employer, which would you prefer, a confined benefit plan or a defined contribution plan? Why? What’s the difference?
Example answer: A defined-benefit plan is an employer-sponsored retirement plan where employee benefits are computed using a formula that considers several factors, such as length of employment and salary history.1 The company administers portfolio management and investment risk of the plan. There are also restrictions on when and by what method an employee can withdraw funds without penalties. Benefits paid are typically guaranteed for life and rise slightly to account for the increased cost of living.
A defined-contribution (DC) plan is a retirement plan that’s typically tax-deferred, like a 401(k) or a 403(b), in which employees contribute a fixed amount or a percentage of their paychecks to an account that is intended to fund their retirements. The sponsor company will, at times match a portion of employee contributions as an added benefit. These plans place restrictions that control when and how each employee can withdraw from these accounts without penalties.
As an EMPLOYER, it would be cost-efficient to offer a defined-contribution plan to my employees, since the employees will be making their own contributions, and I can contribute a fixed amount or percentage. A defined benefit plan or pension would cost me way more than a % contribution to a 401k or 403b. However, if I was an employer that truly cared about keeping loyal employees and cared about the happiness of my employees and wanted to ensure low turnover costs (which can be immense), I would offer the defined benefit plan. This plan however, can be expensive for an employer, and nowadays, most employers don’t offer Pensions. My husband and I are both lucky to be working for employers that offer pensions, and we sure do take that into account and it is factor that keeps us loyal to our employers. My employer also offers a 403 b towards which they also contribute a fixed %. However, I do want to understand more about how these plans work and research how much I will be able to earn as retirement income in different situations.
3. What is the point of breaking the CF Statement into categories? Can’t you figure it out simply by looking at a comparative Balance Sheet?
4. Why do o many companies use the Indirect Method of Cash Flows? Are both methods GAAP?