Exxon ratios are fluctuating within 1.0 to 0.84, whereas Chevron ratio is always greater than 1.50. This clearly indicates that Chevron is in better position in meeting its obligations when compared to Exxon. If this decline continues for Exxon then there are chances where the company cannot meet up its short-term obligations and lead to financial distress. Quick ratio: It is another indicator of liquidity which is determined by subtracting inventory from the current assets and dividing by current liabilities. Inventories are less liquid asset, so it is eliminated in determining this ratio.
The operating performance decline is amplified by the reversals of prior-period accruals based on recent experience. The original accounting estimates were made under very different economic conditions. As the economy or industry slows, managers may find it increasingly difficult to meet the earnings objectives set during the boom times.
If either changes significantly, then that change should be accounted for over the remaining estimated useful economic life. Depreciation Expense is based on the value of the asset and the underlying depreciation assumptions. Now, if based on consequence of these assumptions too less or too much depreciation expense is charged then once it is charged to the Profit and Loss Account, it cannot be retrospectively adjusted in future years. If too much depreciation is expensed the value of the asset is later re-valued upwards and the restated depreciation expense is expensed for second time through PnL again. If too less depreciation is expensed the value of the asset is later re-valued downwards and the restated depreciation expense is expensed for second time through PnL
Although the likelihood of not being able to acquire loans would be minimal, there are increased interest costs with having a lower bond rating. The lower bond rating signals to investors that the firm is more likely to default than if it had a higher (AAA) bond rating.
Whether asset are value at historical cost, book value or market value. The ability to determine if an equipment is measure at fair market value is higher or lower than book value. 3) If book value is greater than the market value, it might spell out that investors lose confidence in the company. Investors might treat that company is incapable of generating future cash flow and earnings will fall. 4) The method of depreciation (straight line, reducing, sum of years’ digits or productive output method) used for each assets.
If the exchange rate increase to £1 to $1.7 it means that England will be making a loss as they wouldn’t buy anything different but the products are costing more money. They will then have to decide whether to have a loss or increase the prices of their products. By increasing the prices it means that England will have fewer sales.
If the company can provide the customer with a substitute product of the stock out product then the degree of loss due to stock out will be much lesser. In order to prevent stock outs it is essential for any company to know the costs attached to the stock out. The company needs to derive relationship between cost of stock out and inventory holding cost. The cost of stock out usually comes in the form of loss of gross margin that could have been earned on the additional units sold. It also has a long term impact on the future orders.
Percentage-of -completion revenue recognition could be permitted but solely when the customer or client owns the work-in... ... middle of paper ... ...rement would be reflected on a company’s balance sheet. The balance sheet will mirror the fair value carrying the amount while amortized cost information is shown in profit or loss. The difference between the fair value and amortized cost data will be identified in other comprehensive income (Snapshot: Financial Instruments). The changes proposed by the International Accounting Standards Board (IASB) will have a significant affect on the General Accepted Accounting Practices of the United States. Most profoundly, the affect will be felt in the areas of revenue recognition, leases, and financial instruments.
Finally a conclusion. Comparability is an accounting principle. The fundamental accounting reports need to be reliable; if they are not reliable it is not comparable. If the company cannot make a comparison then the accounts come impaired. For example, the Financial Accounting Standards Board requires that expenses associated to research and development (R&D) should be expensed when incurred, but some companies expensed R&D when gained.
1. Question 1: Proficient: Explain why proper inventory valuation is so important to the calculation of a company's "bottom line" net income. A merchandise company must be sure it has properly valued it inventory for three reasons. If the ending inventory is overstated, cost of goods are unstated which leads to an overstatement of the gross margin and net income. Overstating the ending inventories also affect the current assets, total assets and retained earnings because any changes to the ending inventory is calculated dollar for dollar (ignoring any, income tax effects), in net income, current assets and retained earnings.