Depreciation Advantages And Disadvantages

• Finance. In the accounting context, depreciation is usually associated with the reduction in the value of a wasting asset usually • Plant and Machinery, Tools and implements, Furniture and fixtures, etc. • Buildings. Such reduction in value transpires due to • Wear and tear occurring due to usage • Obsolescence – due to introduction of new or

In 2002, the SEC adopted new rules and amendments to address public companies’ disclosure or release of certain financial information that is calculated and presented on the basis of methodologies other than in accordance with generally accepted accounting principles. The accrual accounting is more popular and be widely used in business world because it produces more accurate and faithful financial statements that constitute better representation of actual circumstances than its main competitors. The major weakness of accrual accounting is that there is some time issue such like the time of occurred and time of recorded would probably be different and it increases the risk of financial information and the risk of correctness. Also, the accrual accounting generally cost more to operate compared with cash accounting

As a result of the time value of the money, NPV considers the compounding of the discount rate over the span of the project. The NPV of a project mirrors how much cash inflow or outflow and it measures up to or surpasses the amount of project capital required to reserve it. An organization utilize NPV as a method for contrasting their relative profitability with assurance that exclusive the most lucrative endeavors are sought while evaluating numerous projects. A higher NPV shows that the project is more fruitful. The forecasted cash outflow and inflow for every period must be recognized and additionally the expected discount rate in order to compute NPV.

Presently, the company implements the “double-declining balance method” to calculate the amortization expense. However, Gamble is thinking to replace the current method with the “straight-line method” (“Ethics in Accounting, n.d.). Consequently, the change in the method will be reported in the statement of retained earnings as a “cumulative effect adjustment.”

Tax deferred deductions will lower the gross taxable wages for the paycheck by the amount of that deduction. Taxes will not be paid on this deducted amount until a later date, usually after retirement. Many people like this type of deduction because it lowers the amount of taxes being withheld from the paycheck increasing the net pay. These style of deductions could be 401(k), IRA and some insurance premium deductions. 401(k) and IRA accounts have their tax liability paid at the time the money is withdrawn out of the account.

Capital reduction is the process of reducing a firm’s shareholder equity through share repurchases and share cancellations. The reduction of capital method is used if the firm wishes to increase the shareholders’ values and to produce a more efficient capital structure. Hill country can repurchase their shares from the marketplace. A share repurchase not only reduces the number of shares outstanding, it also increases the earnings per share and elevates the market value of the remaining shares in the market. After repurchasing, these shares either will be cancelled or held as treasury shares.

Efficiency Ratios The efficiency ratio is used to measure how the company uses its assets and liabilities internally, these ratios to measure the performance in short term. • Accounts Receivable Turnover This ratio used to measure the firm's effectiveness in extending credit and in collecting debts. The receivables turnover ratio is an activity ratio measuring how successfully a In collecting its AR during the year, if the company has AR turnover 2 that means the AR turned over two times during the year. Accounts Receivable Turnover= Credit sales AR average (assume that 75% sales are credit) AVON= 9.1 ULTA= 41.1 REVLON= 4.12 • Fixed Asset Turnover, Reflecting how efficiently a company has used its assets to generate revenue, a higher ratio indicate of greater efficiency in managing and investing fixed-asset. Fixed Asset Turnover= Net sales/ net assets EVON= 1.63 ULTA= 1.9 REVLON= .77 • Inventory turnover Inventory turnover is a ratio showing how many times a company's inventory is replaced over a specific period of time, the higher ratio the more success is the company in selling its inventory.

Under this form of comparative financial statements, both the comparative income statement and comparative Balance sheet are covered. Such comparative statements are prepared not only to the comparison of the various figures of two or more periods but also the relationship between various elements embodied in profit and loss account and balance sheet. It enables to measure operational efficiency and financial soundness of the concern for analysis and interpretations. Horizontal analysis refers to the comparison of financial data of a company for several years. The figures of this type analysis are presented horizontally over a number of columns.

In general, Trade-Off Theory is another approach on gearing. In addition, this theory recognizes that target debt ratio varies from different organisation (Peake and Neale, 2009). However, the application of the shield tax applies to companies that are safe, with tangible assets, taxable income to shield must to have a peak target ratio. Furthermore, that does not have wealth maximization, and are high in risk resort to equity financing. However when expense are involved there are deferments in the optimum and when no expense is involved the target debt ratio is applicable (Brealy, Myers, Allen, 2011).

By doing this, there is reduction of risk in the society. Risk Transfer Risk management strategy in which an insurable risk is shifted to another party by means of an insurance policy. The insurer sets the policy guidelines and measures under which the insured will be paid the losses. So, based on the list of measures specified in the insurance contract, the insurer pays the insured either a sum of amount or any service based on the type of agreement