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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Explain the Derecognition of Debt

At maturity, the discount or premium on bonds is fully amortized, and the carrying amount is equal to the face value. Upon repayment, bonds payable is reduced by the carrying amount (face value) and cash is reduced by the same…

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Reported and Common-size Cash Flow Statements

Users of financial statements can obtain useful information about a company from analyzing its cash flow statement. This can help them to understand the company’s business and earnings as well as predict its future cash flows. The common-size analysis of…

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Non-cash Investing and Financing Activities

In addition to activities which generate cash flows (operating, investing, and financing), companies also engage in investing and financing activities that do not generate any cash flows.  These activities are therefore not reported on the cash flow statement. Non-Cash Investing…

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Analyze and Interpret Financial Statement Disclosures

Users of financial statements can use financial statement disclosures to better understand a company’s investments in tangible and intangible assets, how those investments have changed during a reporting period, how those changes have affected the company’s current financial performance, and…

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Impairment, Revaluation and Derecognition

The impairment, revaluation, and derecognition of a company’s property, plant, and equipment, as well as its intangible assets can significantly affect the company’s financial statements and the financial ratios derived from them. The Effect of Impairment, Revaluation, and Derecognition on…

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Explain the Impairment of Property, Plant, and Equipment and Intangible Assets

An asset is said to be impaired when its carrying amount is greater than its recoverable amount or fair value. Impairment losses will be recognized whenever the asset’s carrying amount is not recoverable. At the end of each reporting period,…

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Different Amortization Methods for Intangible Assets

Amortization refers to the process of allocating the cost of an intangible asset over the asset’s useful life. Only those intangible assets which are assumed to have finite useful lives are amortized over their useful lives, along the lines by…

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Capitalizing vs Expensing – Effects on Ratios

Discretion regarding whether to expense or capitalize expenditures can impede comparability across companies. For example, a company that expenses its expenditure rather than capitalizing it will have lower profitability in the first year but higher profitability in subsequent years, indicating…

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Financial Reporting of Intangible Assets

There are three primary ways in which intangible assets may be acquired: purchased in situations other than business combinations; developed internally; and acquired in business combinations. The accounting treatment will depend on which of these methods was used to acquire…

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