Reviewed by Somer Anderson
Fact checked by Suzanne Kvilhaug

Debit notes are a form of proof that a business has created a legitimate debit entry in the course of dealing with another business. This might occur when a purchaser returns materials to a supplier and needs to validate the reimbursed amount. In this case, the purchaser issues a debit note reflecting the accounting transaction.

A business might issue a debit note in response to a received credit note. Mistakes (often interest charges and fees) in a sale, purchase, or loan invoice might prompt a company to issue a debit note to ensure that the accounts are accurate.

Key Takeaways

• A debit note is a written transaction that states one business has taken financial action as a result of dealing with another business.
• The note corresponds to a debit note in an accounting log, serving as a record of a revision.
• Business-to-business transactions use both debit and credit notes.

Debit Notes in Transactions

Debit notes and credit notes are used mostly in business-to-business (B2B) transactions.

They correspond to debit and credit entries in accounting logs, serving as documentation of a prior business transaction. They may also be referred to as debit memos.

An example of a debit note would be a corrected invoice for an earlier under-billed invoice from a supplier. Another example would be a retailer seeking reimbursement after returning products to its supplier.

Debit notes include the same general information: the date of the note, a serial number, a brief description of the prior business transaction, details of items returned (including sales taxes and a reference to the invoice), and the signatures of appropriate company authorities.

Note

Debit notes, debit memos, debit receipts, and invoices are similar documents. All are records of financial transactions between businesses.

You are most likely to hear about a debit note following an under-billed invoice. Suppose a supplier shipped $10,000 worth of materials to a client, but only sent an invoice for $9,500. Upon realizing its mistake, the supplier would submit a debit note to its client for the difference of $500 to resolve the issue and make any proper adjustments to its accounting records.

Debit Receipts

There is some ambiguity between the terms debit note and debit receipt. The terms are sometimes used interchangeably.

However, a debit receipt customarily means a written record indicating that a customer owes money to a company. It is rare to see the term debit receipt used for B2B transactions.

Invoices

A debit note or debit receipt is similar to an invoice. The main difference is that invoices always show a sale, while debit notes and debit receipts reflect adjustments or reversals of transactions that have already taken place.

Important

B2B transactions are based on credit. Vendors send shipments to companies and invoice the companies for the amounts owed only after delivery. Debits and credits are the accounting methods used to keep track of these transactions.

Debit notes can be substituted for traditional invoices when a product or service is delivered that is outside of the normal scope of business. This helps distinguish the transaction for both accounting departments and keeps the issuing company from creating a new type of invoice.

Material Returns

Debit notes can be seen as claims against business errors. In the case of returned goods from a purchaser to a vendor or supplier, the debit note shows the change in the accounting logs and requests a return of funds (credit). The supplier or vendor often sends a credit note as proof of the reversal.

For example, say company XYZ returns material to its supplier, company ABC. To record the amount it should be reimbursed, XYZ drafts a debit note. The original purchase was for $5,000, so the debit note should reflect the cost of materials plus local sales tax. The taxes and cost of goods should be separate line items in the note.

Upon receipt, ABC would create a small credit note as proof of understanding, then proceed to reimburse (or offer credit to) company XYZ.

Interest/Commission Receivable

Suppose one business owes interest to a creditor or commission to a third party for services rendered. In such a case, the debit note is normally issued to respond to a received credit note, but a debtor could always issue one unprompted.

Commission receivable debit notes are common between parent companies and subsidiaries. Interest receivable debit notes can be used to adjust prior payments or as a simple form of record keeping.

When Are Debit Notes Most Often Used?

Debit notes are most often used to adjust an outstanding balance due when goods have been returned to a vendor. They could be viewed as requests for a balance adjustment or credit.

What Is the Purpose of a Debit Note?

Debit notes, used only in business-to-business dealings, keep the books straight on both sides of a transaction. They resolve discrepancies that occur only after a transaction appears to have been completed.

Can I Use Business Software to Create Debit Notes?

Yes. Major business-to-business accounting software products allow businesses to create debit notes as needed.

The Bottom Line

Debit notes are issued when a debit entry adjustment is required because money is owed. They are primarily found in under-billed invoices. That is, a supplier has sent an invoice to a customer for a lower amount than it should have charged.

A debit note stipulates the amount of money owed by one of the parties to the other.

How well can current assets cover current liabilities?

Reviewed by Amy Drury

The acid-test ratio (ATR), also commonly known as the quick ratio, measures the liquidity of a company by calculating how well current assets can cover current liabilities. The quick ratio uses only the most liquid current assets that can be converted to cash in a short period of time.

Key Takeaways

• The acid test, or quick ratio, involves assessing a company’s balance sheet to see whether it has enough funding on hand to cover its current debt.
• It is seen as more useful than the often-used current ratio since the acid test excludes inventory, which can be hard to liquidate quickly.
• In the best-case scenario, a company should have a ratio of 1 or more, suggesting the company has enough cash to pay its bills.
• Too low a ratio can suggest a company is cash-strapped, but in some cases, it just means a company is dependent on inventory, like retailers.
• Too high a ratio could mean a company is sitting on cash, but in some cases, that’s just industry-specific, like with some tech companies.

What You Need to Calculate the Acid-Test Ratio

All of the information necessary to calculate the acid-test ratio can be found on a company’s balance sheet and includes the following: 

Current assets or all assets that can be converted into cash within one year:

• Cash and cash equivalents
• Marketable securities
• Accounts receivable

Current liabilities or a company’s debts or obligations that are due within one year:

• Short-term debt
• Accounts payables
• Accrued liabilities and other debts

Calculating the Acid-Test Ratio

The ratio is calculated by totaling cash and equivalents, accounts receivables, and marketable investments, and dividing the total by current liabilities as shown below:

Interpreting the Acid-Test Ratio

Ideally, companies should have a ratio of 1.0 or greater, meaning the firm has enough liquid assets to cover all short-term debt obligations or bills.

The acid-test ratio can be impacted by other factors such as how long it takes a company to collect its accounts receivables, the timing of asset purchases, and how bad-debt allowances are managed.

Certain tech companies may have high acid-test ratios, which is not necessarily a negative, but instead indicates that they have a great deal of cash on hand.

The acid-test ratio is a more conservative measure of liquidity because it doesn’t include all of the items used in the current ratio, also known as the working capital ratio.

The current ratio, for instance, measures a company’s ability to pay short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The acid-test ratio is more conservative than the current ratio because it doesn’t include inventory, which may take longer to liquidate.

1.0

The minimum acid-test ratio a company should have. Firms with a ratio of less than 1 are short on liquid assets to pay their current debt obligations or bills and should, therefore, be treated with caution.

Because the acid test is a quick and dirty calculation, other ratios that include more balance sheet items, such as the current ratio, should be evaluated as a more comprehensive check on liquidity if the acid test appears to fail.

Example

Consider Tesla’s (TSLA) balance sheet for Q1 2024.

The information we need includes Tesla’s Q1 2023 cash & cash equivalents, receivables, and short-term investments in the numerator; and total current liabilities in the denominator.

Cash & equivalents total $22.4 billion + $3 billion in receivables = $25.4 billion (there are no short-term investments listed). Current liabilities total $27.4 billion.

The acid-test ratio for TSLA in Q1 2024 is therefore $25.4 / $27.4 = 0.93

This value is below 1.0, indicating that Tesla’s liquidity is tight and that it may have trouble meeting its short-term obligations.

What Is the Difference Between the Current Ratio and the Acid-Test Ratio?

The acid test or quick ratio only includes the most liquid current assets in the numerator. The current ratio instead uses total current assets, which includes additional items such as inventories that may not be as liquid.

What Does the Acid Test Tell You?

The acid test provides a back-of-the-envelope calculation to see if a company is liquid enough to meet its short-term obligations. In the worst case, the company could conceivably use all of its liquid assets to do so. Therefore, a ratio greater than 1.0 is a positive signal, while a reading below 1.0 can signal trouble ahead.

What Is the Difference Between Liquidity and Solvency?

Liquidity corresponds with a company’s ability to immediately fulfill short-term obligations. Ratios like the acid test and current ratio help determine a firm’s liquidity. Solvency, although related, refers to a company’s ability to instead meet its long-term debts and other such obligations. A company may be illiquid but solvent, for example, or vice-versa.

The Bottom Line

No single ratio will suffice in every circumstance when analyzing a company’s financial statements. It’s important to include multiple ratios in your analysis and compare each ratio with companies in the same industry.

Reviewed by Eric Estevez
Fact checked by Michael Rosenston

The direct cost margin is calculated by taking the difference between the revenue generated by the sale of goods or services and the sum of all direct costs associated with the production of those goods, divided by the revenue generated by these goods or services.

Expressed as a percentage, the direct cost margin indicates what portion of each revenue dollar is retained as profit after accounting for only those expenses incurred for the production of goods and services.

The direct cost margin is often referred to as the gross margin and is an important metric in corporate finance.

What are Direct Costs?

Direct costs are those expenses that can be directly linked to items for sale. For manufacturers, this includes raw materials such as lumber, paint, hardware and the cost of labor needed to build each item. For retail operations, direct costs include the price paid to the wholesaler or manufacturer and any commissions paid to salespeople.

Depending on the operation, it may also include supervisor salaries if the presence of the supervisor is directly and uniquely beneficial to the production or sale of goods. The salaries or wages of employees whose roles are not intrinsically linked to the production or sale of goods are not included as direct costs.

Some other direct costs may include:

• Direct labor
• Direct materials
• Manufacturing supplies
• Wages for the production staff
• Fuel or power consumption related to production

Direct costs are sometimes used synonymously with the cost of goods sold, or COGS.

Calculating Direct Cost Margin

Depending on how revenue and expense data are labeled on company financial documents, this margin may be expressed in two ways:

Direct Cost Margin = (Revenue – Direct Costs) / Revenue

Gross Margin = (Revenue – Cost of goods sold) / Revenue

Measuring Operational Profitability

The direct cost margin is an excellent indicator of whether a company’s most basic expenses are eating into its net profits. A low direct cost margin means relatively little revenue is left over to cover all the other expenses a business incurs in its day-to-day operations. A weak gross margin can easily trickle down to a less-than-impressive net profit margin.

Keeping direct costs down is a crucial component of maintaining a healthy bottom line.

Reviewed by Margaret James
Fact checked by Michael Rosenston

The required rate of return (RRR) and the cost of capital are key fundamental metrics in finance and investing. These measures—which vary in scope, perspective, and use—can affect critical investment decisions for both corporations and individual investors.

The required rate of return is the minimum return an investor will accept for owning a company’s stock, as compensation for a given level of risk associated with holding the stock. Corporations use RRR to analyze the potential profitability of capital projects.

Key Takeaways

• The cost of capital refers to the expected returns on the securities issued by a company.
• The required rate of return is the return premium required on investments to justify the risk taken by the investor.
• These metrics can provide corporations and individuals with insight into key business fundamentals such as their risk/reward profile and opportunity cost.

The cost of capital refers to the expected returns on securities issued by a company. Companies use the cost of capital metric to judge whether a project is worth the expenditure of resources. Investors use this metric to determine whether an investment is worth the risk compared to the return.

When the required rate of return is equal to the cost of capital, it sets the stage for a favorable scenario. For example, a company that’s willing to pay 5% on its raised capital and an investor who requires a 5% return on their asset likely would be satisfied trading partners.

Understanding the Cost of Capital

Businesses are concerned with their cost of capital. At some point, a company must determine when, and for what purpose, it makes sense to raise capital. In addition to deciding how much cash it needs, a firm must decide which method to use to acquire the money.

Typically, a firm will ask: Should we issue new stock? How about bonds? Or perhaps it makes more sense to take out a loan or line of credit? Which capital-raising option is best for our company economically and strategically?

Important

Theoretically, the required rate of return and cost of capital for a given investment should trend toward one another.

Each option comes with risks and costs, against which a firm must weigh the required return necessary to make a capital project worthwhile. Knowing the cost of capital can help a company to compare its options for raising cash more easily.

Calculating the Cost of Debt and Equity Issues

The cost of debt is simple to establish. Creditors, whether individual bond investors or large lending institutions, charge an interest rate in exchange for their loan. A bond with a 5% coupon rate has the same cost of capital as a bank loan with a 5% interest rate.

However, calculating the cost of equities, or stock, is a little more complicated and uncertain than calculating the cost of debt. Theoretically, the cost of equity would be the same as the required return for equity investors. However, it’s not always simple in reality.

Arriving at the Weighted Average Cost of Capital

Once a company has an idea of its costs of equity and debt, it typically takes a weighted average of all of its capital costs. This produces the weighted average cost of capital (WACC), which is a very important figure for any company.

Important

For the cost of a capital project to make economic sense, the profits a company expects to generate should exceed the weighted average cost of capital.

Understanding Required Rate of Return

The required rate of return generally reflects the investor’s, not the issuer’s, point of view in terms of managing risk. In a nominal sense, investors can find a risk-free return by holding on to their money; or they can find a low-risk return by investing in safe assets—short-term U.S. Treasuries, money market funds, and gold.

Risk Is an Important Factor in RRR

Riskier assets may offer potentially higher returns, thus providing investors with a favorable ratio of risk to return. Many investors use risk/reward ratios to compare the expected returns of an investment with the amount of risk they must undertake to earn these higher returns.

Important

Investors who take on greater levels of risk may also reap potentially greater returns.

RRR and Cost of Capital: About Opportunity Cost

Both of these metrics embody the critical concept of opportunity cost—the benefits that an individual investor or business misses out on when choosing one alternative over another.

For example, when an investor purchases $1,000 worth of stock, the real cost is everything else that could have been done with that $1,000—including buying bonds, purchasing consumer goods, or putting it in a savings account. When a company issues $1 million worth of debt securities, the real cost to the company is everything else that could have been done with the money that eventually goes to repay those debts.

The cost of capital and RRR metrics can help market participants of all types—buyers and sellers—to sort through the competing uses of their funds and to make wise financial decisions.

Reviewed by Andy Smith
Fact checked by David Rubin

The total cost of a business is composed of fixed costs and variable costs. Fixed costs and variable costs affect the marginal cost of production only if variable costs exist. The marginal cost of production is calculated by dividing the change in the total cost by a one-unit change in the production output level. The calculation determines the cost of production for one more unit of the good. It is useful in measuring the point at which a business can achieve economies of scale.

Key Takeaways

• Marginal cost of production refers to the additional cost of producing just one more unit.
• Fixed costs do not affect the marginal cost of production since they do not typically vary with additional units.
• Variable costs, however, tend to increase with expanded capacity, adding to marginal cost due to the law of diminishing marginal returns.

Fixed Cost vs. Variable Cost

A fixed cost is a cost that remains constant; it does not change with the output level of goods and services. It is an operating expense of a business, but it is independent of business activity. An example of fixed cost is a rent payment. If a company pays $5,000 in rent per month, it remains the same even if there is no output for the month.

Conversely, a variable cost is dependent on the production output level of goods and services. Unlike a fixed cost, a variable cost is always fluctuating. This cost rises as the production output level rises and decreases as the production output level decreases. For example, say a company owns a manufacturing plant and produces toys. The electricity bill varies as the production output level of toys varies. If no toys are produced, the company spends less on the electricity bill. If the production output of toys increases, the cost of the electricity increases.

Marginal Cost of Production

The marginal cost of production is an economics and managerial accounting concept most often used among manufacturers as a means of isolating an optimum production level. Manufacturers often examine the cost of adding one more unit to their production schedules. At a certain level of production, the benefit of producing one additional unit and generating revenue from that item will bring the overall cost of producing the product line down. The key to optimizing manufacturing costs is to find that point or level as quickly as possible.

Marginal cost of production includes all of the costs that vary with that level of production. For example, if a company needs to build an entirely new factory in order to produce more goods, the cost of building the factory is a marginal cost. The amount of marginal cost varies according to the volume of the goods being produced.

It is not necessarily better or worse for a company to have either fixed costs or variable costs, and most companies have a combination of fixed costs and variable costs. 

A company with greater variable costs compared to fixed costs shows a more consistent per-unit cost and, therefore, a more consistent gross margin, operating margin, and profit margin. A company with greater fixed costs compared to variable costs may achieve higher margins as production increases since revenues increase but the costs will not. However, the margins may also reduce if production decreases.

Other Considerations

Although the marginal cost measures the change in the total cost with respect to a change in the production output level, a change in fixed costs does not affect the marginal cost. For example, if there are only fixed costs associated with producing goods, the marginal cost of production is zero. If the fixed costs were to double, the marginal cost of production is still zero. The change in the total cost is always equal to zero when there are no variable costs. The marginal cost of production measures the change in total cost with respect to a change in production levels, and fixed costs do not change with production levels.

However, the marginal cost of production is affected when there are variable costs associated with production. For example, suppose the fixed costs for a computer manufacturer are $100, and the cost of producing computers is variable. The total cost of production for 20 computers is $1,100. The total cost for producing 21 computers is $1,120. Therefore, the marginal cost of producing computer 21 is $20. The business experiences economies of scale because there is a cost advantage in producing a higher level of output. As opposed to paying $55 per computer for 20 computers, the business can cut costs by paying $53.33 per computer for 21 computers.

The Marvel Cinematic Universe leads the list.

Movie franchises are a cultural touchstone and a lucrative financial opportunity. Film franchises regularly drive billions of dollars of box office revenue and billions more in merchandise sales. If a franchise can reach the pinnacle of financial success, it can benefit its owner for decades. These five franchises, listed by total worldwide gross, have earned a whopping combined $67.52 billion.

Key Takeaways

• The highest-grossing movie franchise of all time is the Marvel Cinematic Universe.
• The top two highest-grossing franchises, the Marvel Cinematic Universe and Star Wars, are both owned by Disney.
• Four of the five highest-grossing franchises are based on either a series of comic books or a series of novels.

Marvel Cinematic Universe

Disney’s Marvel Cinematic Universe, or MCU, is unquestionably the king of lucrative movie franchises. Based on Marvel comic books and superheroes, the MCU is the highest-grossing film franchise in history—the 43 MCU movies have earned over $31.4 billion worldwide—and the franchise has grossed over $20 billion more than the next highest-grossing franchise. Much of this dominance is a result of the extremely popular Avengers movies, which have earned $7.7 billion over four films. An Avengers movie, Avengers: Endgame, also holds the record for second-highest-grossing film of all time at $2.79 billion.

However, MCU’s financial success was not an obvious outcome when Disney first acquired Marvel Entertainment in 2009. At the time, the movie rights to many of Marvel’s most popular characters had already been sold and the Marvel Cinematic Universe was not the mainstream brand it is today. Luckily for Disney, the deal has paid off in mammoth box office and merchandising opportunities as Marvel reacquired many of the characters it had previously sold.

Star Wars

Another Disney property, Star Wars, is the second most valuable movie franchise in the world by box office revenue. After 15 movies, the franchise has grossed a total of $10.32 billion. The highest grossing Star Wars film by nominal revenue, 2015’s Star Wars: The Force Awakens, grossed slightly more than $2 billion worldwide and is the fifth-highest-grossing movie of all time. However, it placed fifth in worldwide gross behind Titanic.

In 2012, Disney acquired Lucasfilm, which owned the rights to the Star Wars franchise, for $4 billion. When merchandise and licensing sales are included with box office earnings, it is clear the investment has paid off handsomely.

Harry Potter

Third on the list of highest-grossing movie franchises, the Harry Potter movie franchise includes both the original eight Harry Potter movies as well as a spin-off series, Fantastic Beasts. The two series make up a movie franchise and shared universe known as the Wizarding World. Based on the popular books by J.K. Rowling, the franchise steadily gained steam over the 2000s; for example, the final Harry Potter movie, Harry Potter and the Deathly Hallows: Part 2, grossed over $1.3 billion worldwide after its release in 2011. With both series combined, the franchise has made a total worldwide gross of $9.6 billion.

Like the Marvel Cinematic Universe and the Star Wars franchise, the Harry Potter franchise has spawned a myriad of related business opportunities. Along with a Broadway play, Harry Potter and the Cursed Child, the franchise is involved in theme parks at Universal Orlando Resort and video games through Electronic Arts.

Spider-Man

The fourth-highest-grossing movie franchise of all time is Spider-Man. While the most recent two live-action Spider-Man movies are included in the total gross of the Marvel Cinematic Universe, the Spider-Man movie franchise includes two earlier series of films and an animated film as well. In total, the Spider-Man movie franchise has grossed $8.9 billion worldwide. The second most recent film, Spider-Man: No Way Home, is the highest-grossing—the film earned almost $2 billion at the worldwide box office.

The Spider-Man film franchise is unique in that, unlike other Marvel properties, the films are not produced by Disney. Instead, Spider-Man films are produced by Sony Pictures. The two companies have managed to come to an agreement over the hero’s inclusion in the MCU, but there are still unanswered questions over the future of live-action Spider-Man movies.

James Bond

Based on the novels by Ian Fleming, the James Bond movie franchise is the fifth-highest-grossing of all time. While the first film in the series, Dr. No, only grossed $59.57 million in 1963, the most recent Bond movie, No Time to Die, grossed more than 12 times as much. All in all, the franchise has made $7.9 billion in total gross over 27 movies. The most successful movie of the franchise was 2012’s Skyfall, which made $1.1 billion worldwide.

The Bond movies are one of the longest-running and most successful film franchises of all time. Over 60 years, eight actors have played the famous spy. While the latest Bond film starring Daniel Craig, No Time to Die, was scheduled for release in 2020, the coronavirus pandemic forced Universal Pictures to delay its release until 2021.

The Bottom Line

When you combine the worldwide total gross of the MCU, Star Wars, Harry Potter, Spider-Man, and James Bond you get a jaw-dropping total of $67.52 billion.

There are rules about how reverse mortgages can be promoted

Fact checked by Vikki Velasquez
Reviewed by Lea D. Uradu

Seniors and retirees who haven’t worked for many years may face the challenge of limited income from savings and investments. Although they own their home outright, they find themselves house-rich but cash-poor. As a result, they might experience financial struggles when they have inadequate cash to meet their financial needs.

A reverse mortgage can help those with limited cash flow by allowing homeowners to borrow against the value of their homes. A reverse mortgage is a type of mortgage loan intended for homeowners age 62 or older with significant home equity.

Homeowners can receive the loan proceeds as a lump sum, fixed monthly payment, or line of credit. Unlike a traditional mortgage, where the borrower makes monthly payments to repay the loan, a reverse mortgage pays the borrower. The loaned money becomes due only after they die, move out of the home permanently, or sell it.

A reverse mortgage can benefit those needing income or cash in retirement. However, troubling issues have surfaced regarding the practices of reverse mortgage advertising. Read on to learn about the federal and state regulations that exist to protect consumers.

Key Takeaways

• Federal laws—including the Mortgage Acts and Practices Advertising Rule (MAPs Rule), the Truth in Lending Act (TILA), and the Consumer Financial Protection Act of 2010—control the practices used when advertising reverse mortgages.
• These rules forbid deceptive claims in mortgage advertising and other commercial communications sent to consumers by mortgage brokers, lenders, services, and advertising agencies. 
• Several states have also passed laws to control reverse mortgage advertising.
• Despite these rules, the Consumer Financial Protection Bureau (CFPB) has raised concerns regarding reverse mortgage advertising practices.
• Consumers should be wary of advertisements that present reverse mortgages as a source of income or government benefit; reverse mortgages are loans.

Problems With Reverse Mortgage Advertising

Unfortunately, there appears to be no shortage of fraudsters targeting seniors and their money, including reverse mortgage scams.

That aside, reverse mortgages have inherent risks which every potential borrower must consider. For example, it’s possible that after a homeowner’s death, the remaining spouse or children might lose the family home. Potential fees (closing and ongoing) can also affect your liquidity.

Harmful Advertising

There have been instances in which reverse mortgages have been described or advertised with false claims.

For example, a California-based reverse mortgage broker falsely told potential customers that a reverse mortgage would mean no payments. The broker further claimed that borrowers would not be subject to costs associated with refinancing a reverse mortgage.

On the contrary, people who take out a reverse mortgage incur a range of costs, including fees for closing, appraisals, title insurance, and property, insurance, and maintenance fees.

Because of consumer confusion, some states have passed laws prohibiting what lenders can and cannot say when promoting reverse mortgages. These rules are in addition to federal regulations that control the advertising practices of mortgages.

Moreover, the CFPB has repeatedly raised concerns about the advertising practices used for reverse mortgages. In a 2015 report, the agency stated that after viewing advertisements for reverse mortgages, “consumers were confused about reverse mortgages being loans, and they were left with false impressions that they are a government benefit or that they would ensure consumers could stay in their homes for the rest of their lives.”

Federal Laws on Reverse Mortgage Advertising

Mortgage advertising is a heavily regulated part of the financial services market. In part, that’s because property is usually the single biggest purchase that most people will ever make.

Broad Regulation

Federal laws exist regulating mortgage advertising to prevent unscrupulous lenders from taking advantage of borrowers. The most important of these laws are the Mortgage Acts and Practices Advertising Rule (MAPs Rule), the Truth in Lending Act (TILA), and the Consumer Financial Protection Act of 2010.

The MAPs Rule, also known as Regulation N, controls the methods used when advertising mortgage services, making deceptive claims illegal.

Specific FHA Reverse Mortgage Regulation

The vast majority of reverse mortgages in the United States are home equity conversion mortgages (HECMs), which the Federal Housing Administration (FHA) insures.

Specific rules exist that apply to reverse mortgages. The FHA regulates the advertising of FHA-backed loans. For example, lenders must explain all requirements and features of the HECM program in clear, consistent language to consumers.

The Federal Trade Commission (FTC) and the CFPB oversee the federal laws relating to reverse mortgage advertising. Both agencies have taken action against mortgage lenders for false claims associated with reverse mortgage advertising.

Warning

The CFPB urges older Americans to watch for misleading or confusing reverse mortgage advertisements. Customers should remember that reverse mortgages are loans, and without a financial plan, you may outlive the loan proceeds.

State Laws on Reverse Mortgage Advertising

In addition to federal legislation, several states have passed laws limiting the practices of reverse mortgage advertising. Some of these laws, such as those in North Carolina, aim to further restrict the ability of reverse mortgage lenders to misrepresent how these loans work.

Others, such as the laws in effect in Oregon, define and require several disclosures—important pieces of information that the lender must communicate to the potential borrower—and specify that these must be prominent and not just appear in the fine print.

A number of states, rather than prohibiting certain types of advertising, have sought to protect consumers by enhancing the counseling session that all potential HECM borrowers must attend.

The U.S. Department of Housing and Urban Development (HUD) requires that all prospective HECM borrowers complete this counseling session. HUD requires the counselors to detail the pros and cons of taking out a reverse mortgage.

How Does the Government Control Reverse Mortgage Advertising?

Strict controls exist for reverse mortgage advertising, and several federal laws prohibit lenders from making deceptive claims in their advertising. These include the Mortgage Acts and Practices Advertising Rule (Regulation N), the Truth in Lending Act (TILA), and the Consumer Financial Protection Act of 2010.

What Is an Example of Reverse Mortgage False Advertising?

The CFPB has found that reverse mortgage advertisements left consumers confused about reverse mortgages being loans, whether they were a government benefit, and whether they ensured that consumers could stay in their homes for the rest of their lives.

Who Regulates Reverse Mortgage Companies?

At the federal level, the CFPB, the Department of Housing and Urban Development (HUD), and the Federal Trade Commission (FTC) regulate reverse mortgage lenders’ activities. Additionally, some states have passed laws controlling the practices of reverse mortgage advertising.

The Bottom Line

Federal and state laws control reverse mortgage advertising. They make it against the law for mortgage brokers, lenders, servicers, and advertising agencies to make deceptive claims in mortgage advertising and other commercial communications sent to consumers.

Despite these rules, the CFPB has been concerned about the methods used to promote reverse mortgages. Therefore, consumers should be wary of advertisements that present this product as a source of income or a government benefit. Reverse mortgages are loans and should be treated as such.

When initiating a short, sellers expect the stock price to head downward. Traders short sell by borrowing a stock that the seller doesn’t own. The seller must deliver the stock to its buyer at an agreed-upon price.

To make this happen, a broker lends a certain number of shares to a seller from that broker’s inventory. The shares are then sold to a buyer, and the proceeds are credited to the seller’s account. Eventually, the seller must close the short position by buying back the same number of shares and returning them to the original broker. If the price of the stock drops, the seller makes a profit by selling back the shares to the broker at a lower cost. If the stock price rises, the opposite happens, and the seller loses money.

Top 5 Most-Shorted NYSE Stocks
Company	Ticker Symbol	Market Cap	Short Interest
Albemarle Corporation	ALB	$11.48B	13.25%
Builders FirstSource, Inc.	BLDR	$20.19B	11.82%
Dayforce Inc	DAY	$8.78B	11.25%
DaVita Inc.	DVA	$12.08B	10.06%
Campbell Soup Company	CPB	$13.76B	9.78%

1. Albemarle Corporation (ALB)

Founded in 1887, Charlotte, N.C.-based Albemarle engages in energy storage, consumer electronics, automotive, pharmaceuticals, and agriculture. The company is a player in the lithium industry, hoping to benefit from the ongoing transition to electric vehicles and clean energy technologies. The company develops, manufactures, and markets engineered specialty chemicals across three segments:

1. Energy storage: Produces lithium compounds for electric vehicle batteries and energy storage systems.
2. Specialties: Offers bromine-based chemicals, lithium specialties, and other high-end materials for various industries.
3. Ketjen: Provides catalysts and related technologies for petroleum refining and petrochemical production.

In its first quarter of 2024, Albemarle reported net sales of $1.36 billion, down 47% year-over-year. Net income for Albemarle was $2.4 million, compared with $1.24 billion a year earlier. The company cited lower lithium prices as the primary reason for the decline.

The company has said it’s been reducing costs to deal with its near-term cash flow issues.

2. Builders FirstSource Inc. (BLDR)

Builders FirstSource Inc. is an Irving, Texas-based supplier and manufacturer of building materials, manufactured components, and construction services for homebuilders, contractors, and consumers. BLDR has 590 locations across 43 states.

In the first quarter of 2024, Builders FirstSource reported net income of $258.8 million, down 22.5% from the previous year.

Despite higher interest rates impacting its bottom line via the housing market, BLDR is still expanding its market share through acquisitions—with several deals in the first half of 2024.

3. Dayforce Inc (DAY)

Dayforce, formerly Ceridian HCM Holding Inc., is based in Minneapolis, Minn., and provides cloud-based platforms for payroll, workforce and talent management, and benefits.

In the first quarter of 2024, Dayforce reported revenue of $431.5 million, up 16.4% year-over-year. Its net income of $7.1 million was down from $9.9 million a year earlier.

Dayforce has been expanding its global footprint. For example, in February 2024, it acquired eloomi, an education platform, to strengthen its talent management offerings. The company said its drop in net income was due to macroeconomic conditions.

4. DaVita Inc. (DVA)

Founded in 1999 and headquartered in Denver, Colo., DaVita manages a network of outpatient dialysis centers for patients suffering from chronic kidney failure. DaVita’s services include outpatient, hospital inpatient, home-based hemodialysis, and related laboratory testing.

In recent years, DaVita has expanded its offerings to include physician services and acute inpatient dialysis care. With more than 2,600 outpatient dialysis centers nationwide, DaVita is a dominant player in the U.S. dialysis market. In recent years, it’s seen substantial growth—both in revenue and debt. The company’s first quarter 2024 revenues were $3.07 billion, up 6.9% year-over-year, and net income was up 79% to $306 million.

DaVita has faced disruptions from a cybersecurity breach at its claims processing intermediary, Change Healthcare, and at the end of March 2024, it held $9.1 billion in debt.

5. Campbell’s Soup Company (CPB)

Campbell’s Soup Company, a stalwart New Jersey-based packaged food company in business since 1869, made news with its $2.7 billion acquisition of Sovos Brands in March 2024. This acquisition added popular and pricier brands like Rao’s, Michael Angelo’s, and Noosa to its line of household brands.

In its third quarter of fiscal year 2024, Campbell reported mixed results. Net sales rose 6% year-over-year to $2.4 billion, primarily driven by the Sovos Brands acquisition. However, earnings per share dipped to $0.44 from $0.53 a year earlier.

The company’s two main segments diverged in performance: Its meals and beverages segment had a solid 15% increase in sales, primarily because of the Sovos Brands acquisition. By contrast, its snacks division declined 2% in sales. The company holds a debt load of $7.1 billion as of its fiscal third quarter of 2024.

What Is Considered a Heavily Shorted Stock?

A company’s stock is considered heavily shorted when a high percentage of its stock is sold short. Short selling involves borrowing shares of a stock and selling them with the expectation that the stock price will decline, allowing the short seller to buy the shares back at a lower price, return them to the lender, and pocket the difference.

Several indicators that can help determine whether a stock is heavily shorted are the short interest ratio, short interest as a percentage of float, and increases in short interest. These are commonly found on finance and investing platforms.

What Is a Short Squeeze?

A short squeeze occurs when a stock or other asset jumps sharply higher, forcing traders who had bet that its price would fall to buy it to forestall even greater losses. Their scramble to buy only adds to the upward pressure on the stock’s price.

How Can I Tell if a Stock is Being Shorted?

To determine if a stock is being shorted and to what extent, you can look at several key indicators. These include short interest, short interest ratio or days to cover, short percentage of float, changes in short interest, utilization rate, and the cost to borrow.

Heavily shorted stocks often have increased volatility, especially when there’s a short squeeze.

What Happens if I Short a Stock and it Goes to $0?

If you short a stock and its price goes to zero, that’s the ideal outcome, resulting in the maximum possible profit on the short sale.

The Bottom Line

The most heavily shorted stocks reflect investor sentiment about perceived risks and weaknesses in those companies. These stocks could serve as critical indicators for broader market trends, highlighting sectors or industries facing headwinds or skepticism from investors.

Understanding the reasons behind short positions can offer valuable insights for contrarian investors looking to capitalize on potential misprices in the market. Conventional investors can use the information to avoid potential pitfalls for a stock.

Reviewed by Andy Smith
Fact checked by Suzanne Kvilhaug

What Is Declaring a Dividend?

Companies often pay out a portion of their profits as dividends to the shareholders. Dividend payouts are a way to provide shareholders with a return on their investment. The board of directors issues a declaration stating how much will be paid out and over what timeframe. This declaration implies liability for the dividend payments. The declaration date is the first of four important dates in the dividend payout process.

Key Takeaways

• The board of directors issues the declaration stating how much will be paid out in dividends to shareholders and over what timeframe.
• The declaration date is the first of four important dates in the dividend payout process.
• The three remaining key dates are the ex-date, the record date, and the payment date.

How Declaring a Dividend Works

Before a cash dividend is declared and subsequently paid to shareholders, a company’s board of directors must decide to pay the dividend and in what amount. The board must agree on the cash amount to be paid to the shareholders, both individually and in the aggregate. The board must also set a record date to determine which stockholders are entitled to receive the dividend, decide on the payment date, and notify the stockholders.

When the board of directors makes such a decision and declares a dividend for payment to stockholders, the retained earnings account on the company’s balance sheet is reduced by the amount of the declared dividend. The retained earnings is an account of equity that shows the net balance of a company’s earnings. Since the retained earnings account is an equity account, dividend payments must be deducted from the account, reflecting the reduction in total shareholder equity.

Important

There are four important dates related to dividend payouts. The first, the declaration date, is a commitment by the company to pay the stated amount to shareholders.

The debit to the retained earnings account is balanced by a credit to the dividends payable liability account. The same process applies to declarations of dividend payments for either preferred or common stock.

Key Dividend Dates

There are four key dates involved in the dividend process, of which the declaration date is the first.

1. The declaration date is also referred to as the announcement date since a company notifies shareholders and the rest of the market. The declaration date is the date on which a company officially commits to the payment of a dividend.
2. The ex-dividend date, or ex-date, is the date on which a stock begins trading without the dividend. To receive the declared dividend, shareholders must own the stock prior to the ex-dividend date.
3. The record date usually occurs three business days after the ex-dividend date and is the date on which a company officially determines the shareholders of record, those who owned the stock prior to the ex-dividend date, who are eligible to receive the dividend payment.
4. The payment date is the date the company sends out dividend payments to shareholders. The payment date is usually about one month after the record date.

Fast Fact

Dividend payments must be deducted from the retained earnings account, which is an equity account, to reflecting the reduction in total shareholder equity.

When Should You Buy a Stock to Qualify for a Dividend?

In order to qualify for a cash dividend, you must own that stock on the ex-dividend date. In other words, you should buy the stock on the trading day before the ex-dividend date (or earlier) and sell it no sooner than the day after that date. If you buy a stock on or after the ex-dividend date, you will not qualify for the associated dividend.

What’s the Difference Between Dividends and Buybacks?

A dividend is when a company distributes a portion of its retained earnings to shareholders as cash, while a buyback occurs when the company buys some of its shares on the open market to boost the price. Unlike dividends, a buyback does not incur a taxable event until the shareholder actually sells their shares.

How Do You Pay Taxes on Dividends?

If a company pays you more than $10 in dividends, they should send you a copy of Form 1099-DIV to report income from dividends and distributions. If you receive more than $1,500 in taxable dividends, you will need to report them on Form 1040 Schedule B: Interest and Ordinary Dividends.

The Bottom Line

When a company wants to return some of its earnings to shareholders, the board of directors will announce a dividend date sometime in the future. Anyone who owns the stock on that date will qualify to receive a portion of that dividend. Stock prices typically increase leading up to the ex-date as prospective investors seek a share of the dividend.

Reviewed by Ebony Howard
Fact checked by Suzanne Kvilhaug

The U.S. tax code does not allow taxpayers to deduct penalties assessed by the Internal Revenue Service (IRS). IRS penalties are typically assessed for violations of tax laws, such as misreporting income or claiming false deductions or tax credits. The IRS typically assesses penalties along with interest on the balance owed by a taxpayer, and this interest is not tax-deductible.

Key Takeaways

• Taxpayers cannot deduct IRS penalties on their tax return.
• Penalties are commonly assessed for a failure to file or pay and for dishonored checks.
• Penalties vary according to the type of violation and may accrue until the account is fully paid or until the taxpayer enters into an approved payment plan.
• Extensions filed via Form 4868 extend the tax filing deadline, but do not extend the deadline to pay income taxes.

IRS Penalties

Fines and penalties a person owes to the government for violating local, state, and federal laws are never deductible. The IRS typically sends a notice to a person after a tax audit and assesses both penalties and interest on any unpaid amounts.

Although taxpayers are not allowed to deduct penalties, they may qualify for relief for extenuating circumstances. If approved by the IRS, all or a portion of the penalty may be relieved. However, interest still accrues until the amounts owed are fully paid.

Failure-to-pay penalties are assessed on the tax owed after the due date, for each month or partial month, until the taxpayer’s account is resolved. The IRS allows installment agreements to pay off the outstanding balance and to stop the assessment of failure-to-pay penalties.

Most often, penalties are assessed for dishonored checks, or for failing to file your tax return by the required due date, failing to pay the full amount of taxes owed by the due date, or failing to pay the proper amount of estimated taxes. Penalties vary according to the type of violation.

For example, a penalty of 5% of the tax required is assessed when the taxpayer fails to file on time, and it is charged each month that the return is late, up to five months. The IRS assesses a 0.5% penalty on taxes not paid by the tax filing due date, which is generally April 15. The IRS website notes: “If both a failure-to-file and a failure-to-pay penalty are applicable in the same month, the combined penalty is 5% (4.5% late filing and 0.5% late payment) for each month or part of a month that your return was late, up to 25%.”

Taxpayers have the option to extend their tax filing deadline by filing an extension using Form 4868. However, an extension on filing your return does not extend the deadline for your tax payments.

Important

Any individual taxpayer can request an automatic six-month extension on your tax deadline, until Oct. 15. Interest will continue to accumulate, but you will not owe penalties.

Legal Fees Deductibility

According to IRS Publication 529, legal expenses incurred in attempting to produce or collect taxable income or paid in connection with the determination, collection, or refund of any tax are no longer deductible.

You can deduct expenses of resolving tax issues relating to profit or loss from your business (Schedule C), rentals or royalties (Schedule E), or farm income and expenses (Schedule F) on the appropriate schedule.

However, expenses for resolving nonbusiness tax issues are miscellaneous itemized deductions and are no longer deductible.

Other Penalties

While IRS penalties cannot be deducted, other penalties related to business activities can be deducted by companies on a tax return. For instance, penalties paid by a manufacturing company due to nonperformance on a construction contract are typically deductible as a business expense.

How Do You File an Extension on Taxes?

There are three ways an individual taxpayer can qualify for an extension on their tax return due date. You can use IRS Free File online to electronically request an extension until Oct. 15, or submit Form 4868 in the mail. You should still pay the estimated amount due on the original due date to avoid penalties. Also, Americans who live overseas can qualify for an automatic two-month extension after their normal due date.

What Do You Do If You Get Audited by the IRS?

An IRS audit can be stressful, but it not necessarily an accusation of illegal wrongdoing. In most audits, the IRS requests additional documentation to confirm the deductions and expenses in your return. If that happens, be sure to respond by the deadline or request additional time, if needed. If an in-person audit is requested, you have the right to be accompanied by a tax attorney or professional.

How Much Does It Cost If You Don’t Pay Your Taxes?

The IRS has two types of penalties for unpaid taxes: one for failure to file, and another for failure to pay. If you are required to file a return and do not file, you must pay a penalty of five percent of the amount due each month, up to a maximum of 25%. If you do file, but fail to pay, the penalty is 0.5% of the amount due for each month, up to 25%. However, in certain circumstances, you may qualify for taxpayer relief.

The Bottom Line

The Internal Revenue Service may impose penalties for unpaid taxes, and these penalties grow with interest. Moreover, you can’t deduct those payments from future taxes. For that reason, it’s important to pay your taxes or request an extension to avoid penalties.