Depreciation is how the organization or the company records the cost of the long term assets within a time. During depreciation, each company records the cost of the assets that are depreciating. The depreciating cost of an asset is recorded in the income statement of the company. When the asset cost is recorded, the company will be in a position to understand how their asset has depreciated from its original cost to the current cost. Depreciation reduces the value o f the asset such that at the end, the cost of the asset goes down. The type of depreciation chosen by a company determines the lifespan of that particular asset. This therefore means that, since depreciation, that is, accelerated depreciation affect the company’s income statement, it also affects the financial rations of the company that depend on the balance sheet. There are several financial ratios that are affected by the depreciation method chosen by the company. Some of the financial ratios include; the returns from the assets, profit margin, debt of assets and the debt of equity. …show more content…
The net profit is expressed in percentage. The company calculates its net profit by dividing the average income by the total assets. When the average income of the company is high, the company is said to have made the profit from its assets. Depreciation affects the income earned by the company therefore affecting the net profit of the company (Robinson, et.al. 2012). Accelerated depreciation within the company reduces the company’s net income. Accelerated depreciation not only reduces the net income of the company but also reduces the value of the assets. Return on assets therefore is a financial ration that is affected by the choice of the depreciation method since the net income earned and the value of the asset directly affects the net
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.
In the operating budget, the organization prepares to include the costs of acquisition of items to assist in providing goods and services in more than one fiscal year. In the case of Denison, the organization considers a capital purchase of $500,000 in oncology equipment to better serve their patients. The purchase of the new equipment will be paid immediately, however, the equipment maintains a five-year life span and expected to be used evenly over that life time (Finkler et al., 2013). After the five-year life of the equipment, the value amounts to zero because the capital item charges as an expense on a straight-line depreciation—the cost of asset spread over the useful life (Hui, 2013). The following graph illustrates the depreciation expense of the oncology equipment purchased by Denison Hospital.
Return on sales is decreasing and is below the industry average, but the goods news is that sales and profits have been increasing each year. However, costs of goods are increasing and more inventory is left over each year causing the return on sales to decrease. For 1995, it was 1.7% which is less than the average of 2.44% but is a lot higher than the bottom 25% of companies as seen in exhibit 3, which actually have negative sales return of 0.7%. Return on equity is increasing each year and at a higher rate than industry average. In 1995, it was 20.7%, greater than the average of 18.25% and close to the highest companies in exhibit 3, of 22.1% showing that the return in investment in the company is increasing, which is good for the owner.
The first method we will review is the accounting method. Through this accounting approach we will analyze specific ratios and their possible impact on the company's performance. The specific ratios we will review include the return on total assets, return on equity, gross profit margin, earnings per share, price earnings ratio, debt to assets, debt to equity, accounts receivable turnover, total asset turnover, fixed asset turnover, and average collection period. I will explain each ratio in greater detail, and why I have included it in this analysis, when I give the results of each specific ratio calculation.
By dividing net sales by net fixed assets, an investor can see if the company is using its fixed assets efficiently. Since fixed assets are often high price items, it is important that a company is using the fixed assets well; the higher the ratio, the better. Since we are lacking information on what type of industry this is, it is hard to put to much significance on the ratio. Since the ratio is similar, even a little higher, than the competitor, it could be safe to say that this is normal for the
The net income % ratio has fluctuated from 2013 to 2015. In 2013 the net income % was -82.73 % where it increased significantly to -146.11% in 2014 and then decreased to -95.62% in 2015. In 2013 the growth profit was well below the break even point, in 2014 it increased even more below the break even point (-146.11%). Although the company has recently increased its growth profit in 2015 they are still having problems in this area.
Ratio of profitability is distinct to examine a firm’s ability to produce cash flow which is comparative to some metric. This is to establish the amount invested in the company. This ratio analyses and a...
Lastly, the total asset turnover compares total operating revenue to total assets. The process entails the more revenues an organization can generate per dollars of assets, the more efficient it is, other things being equal, (Finkler, S.A., Ward, D.M. & Calabrese, I.D., 2013). Furthermore, by dividing the amount of the revenue from the year by total assets the ratio will show the amount of revenue for every amount in assets. This ratio method also useful and can help determine the cause and if there are ways to use assets more efficiently and generate more revenue.
Profitability ratios express ability of the company to produce profit. This shows how well a company is performing in a given period of time. To compare the profitability for the companies, the investors use profitability ratios that are return on equity, profit margin, asset turnover, gross profit, earning per share. Return on asset indicates overall profitability of assets. It is the relationship between net income and average total assets. GM has 0.034 and Ford has 0.036. This indicates Ford is more profitable. Profit margin is how much of every dollar of sales the company keeps. Computing profit margin, net income divided by net sales. This indicates higher profit margin is more profitable and it has better control. Thus, GM’s profit margin is 3.4 percentages and Ford’s is 4.9 percentages. This indicates Ford has better control profitably compared to GM. Next ratio is gross profit rate. It is how much of every dollar is left over after paying costs of goods sold. Assets turnover represents how efficiency a company uses its assets to sales. This ratio is relationship between net sales and average total assets. GM’s is 0.98 and Ford’s is 0.75. This result represents GM is using its assets more efficiently. Gross profit margin is dividing gross profit, which is equal to net sales less cost of gods sold, by net sales. This ratio indicates ability to maintain selling price above its cost of goods sold. GM’s gross profit rate is 11.6 percentages. Ford’s is 5.7 percentages. GM is higher ratio, and it indicates strong net income. Also, it indicates the company has to spend lower operating expenses and the company is able to spend left money for covering fixed costs. Earnings per share indicate the company’s net earnings to each share common stock. This ratio shows margin between selling price and cost of goods sold. From these companies’ income statement, GM is $2.71 and Ford is $1.82. Because GM’s value is higher relative to Ford’s,
Return on Assets (ROA) is defined as net profit/total assets. This ratio shows the earnings on employed assets. Higher the ROA, more efficiently assets have been used. In 2012, it is -13.6% but in subsequent year 2013, it is improved to 1.6%. This ratio is also low and need serious attention.
The rate of return on assets measures the use of corporate creditors and owners of total profits. The higher the index, the better use of corporate assets, indicating that enterprises succeed in income and savings .The use of funds achieved good results. As Sainsbury, its ROA in 2014 was 4.33%, down by 1.56% in 2016 slightly, but overall remained stable, which shows the capital flow quick speed , the small amount of funds occupied, the volume of business. Due to its stability, the risk of operation is low and the level is good. The return on equity shows the return on the capital provided by the shareholders after payment to other capital providers. The return on equity from 2014 to 2016 was 11.25%, 2.84% and 7.8%, respectively, meaning a moderate return to shareholders. These two returns are better than tesco, revealing the superiority of Sainsbury 's capital
Debit ratio-the ratio of liabilities to assets indicates that their liabilities are increasing as a proportion of total assets. This is having an affect on the Times Interest Earned ratio, which is deteriorating rapidly. It also indicates their obligations are growing- another indication of potential cash flow problems and an inherent risk to a going concern issue that might influence the potential manipulation of the financial
Depreciation expense refers to a portion of capital asset that is deemed to have been consumed or expired, and thus becomes an expense. Table X below shows the ownership costs of lithium-ion batteries.
Accounting concepts and conventions as used in accountancy are the rules and guidelines by which the accountant lives. The historical cost accounting convention is an accounting technique that values an asset for balance sheet purposes at the price paid for the asset at the time of its acquisition.
...ciates its assets on a straight line basis. Both IAS 16 and GAAP, depreciates assets over its expected useful life.