Introduction:-Fixed assets like plant and machinery etc. are used for the purpose of production of goods or for providing useful services in the course of production. Value of such fixed assets decreases with the passage of time and its utilization i.e. wear and tear. Such decrease in the value of an asset is termed as depreciation. Depreciation has been defined as ‘the diminution in the utility or value of an asset, due to normal wear and tear, exhaustion of the subject-matter, effluxion of time accident, obsolescence or similar causes’. In other words, when an asset held by a business cannot be used as efficiently and effectively in future as it was used earlier, the loss caused to the business will be depreciation. Depreciation caused by
It is called Fixed Installment Method because the amount of depreciation remains fixed or same from year to year. It is also called ‘Straight Line Method’ or ‘Constant Charge Method’.
Formula for calculating depreciation amount is as follows:
Depreciation = Cost - Residual Value Estimated Life
Case 1: Cost of an asset is Rs. 11,000 and its residual value after its estimated life of 10 years is expected to be Rs. 1,000, then the amount of annual depreciation is as under- Depreciation = 11,000 – 1,000 = Rs. 1,000 10
Diminishing Balance Method: -Under Diminishing Balance Method is calculated at a fixed percentage of written down value of asset. The method implicitly assumes that benefit accruing to business by utilization of asset keeps on decreasing as the asset gets old. As the value of asset keeps of decreasing from year to year, the amount of depreciation charged to different accounting year decreases with passage of time.
Formula for calculating rate of depreciation is as follows:
Rate of Depreciation = [█(1-n√((Residual Value )/(Cost of Asset))@)]× 100
Where n = Number of years of asset
Accounts receivable ending balance= Beginning balance +sales on Account - cash receipts -sales returns and allowances- charge of uncollectible account
In order to determine the value of operations, and using proforma income statement and balance sheet statement, Cash flow statement was formulated for the next 5 years. The Account Receivables plus the Inventory minus the Account Payable was determined as Net Operating Working Assets. An organization cost of 0,000 was amortized over the 5-year period.
Depreciation helps match the expense of using long lived assets with the revenues the assets helped to produce> what means is that Delta ns Singapore pole Air line depreciates one of its airplanes, it is trying to match the cost of air flight to the revenue that air craft helped to produce. Because air crafts can be an item used for more than one income statement period, Delta and Singapore Airlines don't recognize the air crafts entire cost as an expense immediately. Instead, the companies record them as assets on the balance sheet. Then, in each year of the assets useful life, the companies should recognize a portion of the Item's costs as an expense.
The method of depreciation the company uses is the straight-line method. The straight-line method is the most common method of calculating deprecation; therefore, it makes logical sense that this is the method that Lowe's Home Improvement uses.
The continuing value for the residual earnings was determined by taking 2010s projected residual earnings and multiplying it by 1 plus
The receivables turnover is based on the assumption that all sales are credit sales. The values of receivables turnover for 2004 and 2005 are 10.21 times and 8.83 times, respectively. This means that IQ’s efficiency is considerably declining in terms of cash collection. The decrease in receivables turnover is explained by the higher increase in average net receivables (71%) than the increase in net credit sales (25%).
This pronouncement required the deferral method of accounting for income taxes. When the accounting net income exceeded taxable net income, balancing credit should be recognized, when the taxable net income exceeded the accounting, a balancing debit should be recognized. This was considered a deferred credit and a deferred debit. Deferred charges and credits were default classification and were placed on the Balance Sheet in what was called "no man's land," or some undefined region, between liabilities and owner's equity for deferred credits and between assets and liabilities for deferred charges. Under APB Opinion #11 it was believed that the balancing credits and debits would eventually reverse and cancel out and therefore it was to be treated as a temporary measure.
For goodwill, under GAAP, there is a two-step test to determine the impairment. The first step is to determine if the fair value is less than the carrying value. If the fair value is greater than there is no more testing for impairment. If the fair value is less than the carrying value than you must proceed to the second step. In the second step a comparison of the implied fair value of goodwill and the carrying amount of goodwill is required to determine whether goodwill is impaired. If the implied fair value of goodwill is greater than the carrying amount, than the difference is the impairment loss recognized. Under IFRS, goodwill is tested at the cash-generated unit for impairment. If the fair value, less costs, is less than the cash-generated unit, the difference is the impairment loss. The loss will reduce the value of the
The sunk cost fallacy is an expense that took place in the past and that cannot be recovered. A phenomenon that leads someone to make a decision based solely on a previous financial investment would be also. For this reason, people who have made bad decisions on costs also are affected in the decisions carried out daily since they use the same pattern of conduct. It is a cognitive bias that we have all human beings and sometimes take us decisions that do not suit us. Human beings affects us due sunk cost fallacy that never like to lose, or abandon a project in which have invested a lot of time, energy and money because that would mean that assume that you never recover resources used. Acting in this way is part
Product stops being a star product for the firm and becomes a dog instead due to rise in competition, loss of market share and slow market growth. Companies tend to liquidate their assets in such case to stay alive.
This is the rate of return (the discount rate) at which the net present value of the investment is zero, or that is the discount rate at which the discounted income from the project is equal to the investment costs
Solutions Matrix defines DCF as a “cash flow summary adjusted so as to reflect the time value of money (The Meaning of Discounted Cash Flow, 2014).” The valuation of money paid or received in the future has less monetary value if that same money was to be received or paid today (The Meaning of Discounted Cash Flow, 2014). This cash flow evaluation helps managers in their determination whether or not to invest in research and development, purchase more equipment, enlarge floor space, and increase laborers, or instead, retain net profits. Either way, the DCF valuation gives peace-of-mind in making the right financial decisions at the right time. The main intent of cash flow valuation is to give an estimation of return upon investment. If the initial investment is lower than its return, it is typically considered a wise
When compared to the physical capital maintenance concept, the financial capital maintenance concept is the better choice for standard setting when distinguishing between a return of capital and a return on capital. The main argument in favor of physical capital maintenance is that it provides information that has better predictive value, confirmatory value, and is more complete. However, due to agency theory, prospect theory, and positive accounting theory, neutrality and completeness under physical capital maintenance would be impaired so gravely that predictive value and confirmatory value become inefficacious. As a result, financial capital maintenance, with its use of historical cost, is able to provide information to decision makers with stronger confirmatory value and predictive value.
The accounting cycle is a series of steps starting with recording business transactions and leading up to the preparation of financial statements. This financial process demonstrates the purpose of financial accounting–to create useful financial information in the form of general-purpose financial statements. In other words, the sole purpose of recording transactions and keeping track of expenses and revenues is turn this data into meaning financial information by presenting it in the form of a balance sheet, income statement, statement of owner’s equity, and statement of cash flows.
A “Fixed cost” can be defined as “a cost that does not change with an increase or decrease in the amount of goods or services produced or sold”. It is time related.