Choice of Depreciation Method and Assumptions
Financial statements and the ratios derived from them may be significantly impacted by a company’s selected depreciation method and accompanying assumptions and estimates. Companies should review the estimates used periodically to ensure that they remain reasonable. The Effect of the…
Different Depreciation Methods for Property, Plant, and Equipment
Depreciation refers to the process of allocating the cost of a tangible asset over its useful life. Based on the cost model of reporting long-lived assets, the capitalized costs of long-lived tangible assets, other than land, are allocated to subsequent…
Calculate and Interpret Segment Ratios
To gain a detailed understanding of a company, it is necessary to evaluate the performance of its individual business segments, i.e., its subsidiaries, operating units, and operations in different geographical areas. This evaluation is facilitated by the fact that both…
Ratios Used in Equity Analysis and Credit Analysis
Equity analysis involves the evaluation of a company’s equity to determine its relative attractiveness as an investment. Several methods can be used in this evaluation, including valuation ratios, discounted cash flow approaches, and residual income approaches. In credit analysis, the…
DuPont Analysis of Return on Equity
Return on Equity (ROE), i.e., net income divided by average shareholders’ equity, measures the return that a company generates on its equity capital. DuPont analysis is a technique that can be used to decompose ROE into its constituent parts. The…
Activity, Liquidity, Solvency, Profitability, and Valuation Ratios
Financial ratios are used to express one financial quantity with reference to another. Financial ratios can assist with company and security valuations, as well as stock selections, and forecasting. A variety of categories may be used to classify financial ratios….
Presentation of Defined Benefit Pension Plans
Under a defined contribution plan, a company contributes a defined amount, i.e., pension expense into the plan. Under a defined-benefit plan, a company commits to pay future benefits to employees during their retirement. Presentation and Disclosure Related to DC and DB…
Measurement of Finance Leases
Introduction In a finance lease, the lessor transfers substantially all the risks and rewards incidental to legal ownership of a leased asset. A finance lease is also economically similar to borrowing money and buying an asset. Initial recognition, measurement, and…
Leases from a Lessee’s Perspective
A finance (or capital) lease is equivalent to a lessee’s purchase of an asset that is directly financed by the lessor. An operating lease, on the other hand, is an agreement that allows a lessee to use an asset for…
