Latka Novatny Gave You the Following Information to Use in the Preparation

question 87

Essay

Latka Novatny gave you the following information to use in the preparation of his current year's tax return:
$\begin{array}{ll}\text { Salary } & \$ 120,000 \\\text { Dividends } & 20,000 \\\text { Itemized deductions } & 35,000\end{array}$ In addition, he received $40,000 from a relative for whom he had worked previously. You have researched whether the $40,000 should be classified as a gift or compensation and are confident that substantial authority exists for classifying it as a gift. What tax compliance issues should you consider in deciding whether to report or exclude the $40,000?

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Definitions:

Cash Inflows

This term describes the movement of money into a business or entity, typically from operations, investments, or financing activities.

Average Accounting Return (AAR)

A financial ratio that represents the average net income divided by the average book value of the investment over its life, typically used in capital budgeting.

Target AAR

Desired average annual return; a financial goal for the average rate of return over a specific period typically set by investors for their investment portfolio.

Profitability Index (PI)

The profitability index is a ratio that calculates the present value of future cash flows from an investment divided by the investment's initial cost, used to assess the desirability of a project.