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 on a periodic basis to ensure that they remain reasonable. The…

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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…

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Calculate and Interpret Segment Ratios

In order 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 geographic areas. This evaluation is facilitated by the fact…

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Ratios Used in Equity Analysis and Credit Analysis

Equity analysis involves the evaluation of a company’s equity in order to determine its relative attractiveness as an investment. A number of methods can be used in this evaluation, including valuation ratios, discounted cash flow approaches, and residual income approaches….

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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 which can be used to decompose ROE into its constituent parts, which…

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Activity, Liquidity, Solvency, Profitability, and Valuation Ratios

Financial ratios are used to express one financial quantity in relation to another and can assist with company and security valuations, as well as with stock selections, and forecasting. A variety of categories may be used to classify financial ratios….

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Calculate and Interpret Leverage and Coverage Ratios

Solvency describes a company’s ability to meet its long-term debt obligations. Leverage ratios and coverage ratios are the two primary types of solvency ratios that are used in evaluating a company’s level of solvency. Leverage ratios focus on the balance…

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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 makes a commitment to pay future benefits to employees during their retirement. Presentation and disclosure of defined contribution…

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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…

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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 allowing a lessee to use an asset for a…

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