Depreciation is the permanent decrease in value of a non-current asset during a given accounting period. (Company Act , 1965) .Depreciation is the term applicable to tangible non-current asset which has physical substance, can be seen and touched. First of all, Straight Line method is also known as Fixed Instalment method. It is the most commonly used method. The annual depreciation expense or charge to the profit and loss account.
Depreciation is a method of allocating the cost of a tangible asset over its useful economic life. Depreciation also means that loss value of an asset due to the unfavourable market conditions. Other definition of depreciation is a non-cash expense that decreases the value of an asset. Why depreciation happen? There are four reasons that have make depreciation happen.
• 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
Due to frequent turnover in the accounting department, a different method of depreciation was used for each delivery truck purchased. Information pertaining to each delivery truck is summarized
She reasons that if the company had recorded more depreciation during the assets’ lives when they were in use, the losses would not be so great. Since depreciation is included among the company’s operating expenses, she wants to report the losses in the income statement along with the company’s expenses, where she hopes it will not be noticed. Instructions: (a)What are the ethical issues involved? (b)Who are the stakeholders? (c) What are the possible alternatives for reporting the losses?
Summary The case shows the differences in depreciation as the major operating expense in the examples of two airlines: Delta AL and Singapore AL. It also displays different practices in calculating the depreciation expense. Question 1: Calculate the annual depreciation expense that Delta and Singapore AL would record for each $100 gross value of aircraft. For each airline, there are several periods with different asset life and residual values. Considering that: Depreciation = (Asset value – Residual Value) / Asset useful life, then Delta (Exhibits 4) Straight-line method Before July 1, 1986 July 1, 1986 – March 31, 1993 After April 1, 1993 Asset Useful life (years) 10 15 20 Residual Value (%) 10 10 5 Depreciation ($) 9 6 4.75 Singapore
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.
Conversely, it adds the amount of decrease in assets to the net profit to arrive at the cash from (used for) operating activities. The amount of increase in liabilities (such as accounts payable) are added while decreases are subtracted from the net profit to calculate the cash from (used for) operating activities. c) The cash paid for the business combination is shown in the investing activities section on the statement of cash flows. d) GE did not have any Noncontrolling subsidiary interest or acquired in-process research and development cost. It would have recorded them in the investing section of the Statement of Cash
1st step is to determine whether there are any indicators present for asset or asset group to be reviewed for disposal. Asset disposal could be by selling the asset, abandonment, exchange for a productive asset or other methods defined by company. 1.1 Indicators for Asset disposal Some of the circumstances are listed below which could be the possible indicators for asset disposal review: a. Significant decrease in the market price of an asset or group of assets. b.
When a company is going out of business, the values of the assets usually suffer because they have to be sold under unfavorable circumstances. The values of such assets often cannot be determined until they are actually