course title: financial statement analysis course code: mgt-537 course instructor: dr. hafiz...
TRANSCRIPT
Course Title: Financial Statement Analysis
Course Code: MGT-537
Course Instructor: Dr. Hafiz Muhammad Ishaq
Total Lectures: 32
Previous Lecture Summary
• Accounting Cycle, • Auditor’s Opinion and Auditor’s Report • Closing of Temporary Accounts• T-Accounts• Balance Sheet formats • Types of Assets • Inventory Methods
Today's Lecture Topic
• Basic Elements of the Balance Sheet
• Assets, Current and Fixed Assets• Different methods of depreciation• Current liabilities.
Current Assets
• Prepaid– Expenditures made in advance of the use
of the service or goods.– Examples
• Insurance• Advertising
Long-Term Assets: Tangible
• Land– Carried at acquisition cost– Not subject to depreciation– Natural resources are depleted
• Buildings– Cost plus permanent improvements– Depreciated over the useful life
Long-Term Assets: Tangible (cont’d)
• Machinery– Acquisition cost plus costs of delivery,
installation, and permanent improvements– Depreciated over the useful life
• Construction in Progress– Assets under construction– Transferred to permanent asset account
upon completion
Long-Term Assets: Tangible (cont’d)
• Accumulated Depreciation– Carries the to-date depreciation of plant assets– Factors used in depreciation calculation
• Asset cost• Length of the life of the asset• Estimated salvage (residual) value of asset when retired
– Depreciation methods– Straight Line – Double Declining Balance– Sum-of-the-Years’-Digits – Units of Production
• Balance sheet presentation
Cost of the asset – Accumulated depreciation= Net book value
Depreciation: Straight-Line Method
Cost - Salvage Value = Annual Depreciation
Estimated Life
10,000 - 2,000 = $1,600
5 years
Cost............................. $10,000 Estimated salvage.......... $2,000Estimated life.............. 5 years
Year
Deprec. for the Year
Accumulated Depreciation Asset Cost
Book Value
1 $1,600 $1,600 $10,000 $8,4002 1,600 3,200 10,000 6,800 3 1,600 4,800 10,000 5,200 4 1,600 6,400 10,000 3,600 5 1,600 8,000 10,000 2,000
The salvage value is not depreciated.
Depreciation: Declining-Balance Method
1 2 = double the straight-line rate
Estimated Life
1 2 Book Value at Beginning of Year = Annual Depreciation
5
YearAsset Cost
Beginning Accum.
Dep.Beginning
Book ValueDeprec. for
the Year
Ending Book Value
1 $10,000 $0 $10,000 $4,000 $6,0002 10,000 4,000 6,000 2,400 3,600 3 10,000 6,400 3,600 1,440 2,160 4 10,000 7,840 2,160 160 2,000 5 10,000 8,000 2,000 - 2,000
Scrap value is not used in the depreciation formula but depreciation ends when the book value is equal to the salvage value.
Cost............................. $10,000 Estimated salvage.......... $2,000Estimated life.............. 5 years
Double the straight-line rate is the maximum rate
Depreciation: Sum-of-the-Years’-Digits Method
Cost............................. $10,000 Estimated salvage.......... $2,000Estimated life.............. 5 years
Number of Remaining Years Cost - Salvage = Annual Depreciation
Sum of Digits of Estimated Life
5 10,000 - 2,000 = $2,666.67
1+2+3+4+5
Year
Cost Minus
Salvage FractionDeprec. for
the Year
Ending Accum.
Dep.
Ending Book Value
1 $8,000 5/15 $2,666.67 2,666.67$ 7,333.33$ 2 8,000 4/15 2,133.33 4,800.00 5,200.00 3 8,000 3/15 1,600.00 6,400.00 3,600.00 4 8,000 2/15 1,066.67 7,466.67 2,533.33 5 8,000 1/15 533.33 8,000.00 2,000.00
Depreciation: Units-of-Production Method
Cost - Salvage Value = Per Unit Depreciation
Estimated Life in Capacity
10,000 - 2,000 = $0.50
16,000 hours
Cost............................. $10,000 Estimated salvage.......... $2,000Estimated total hours..... 16,000
• Hours of Operation × Rate = Depreciation
• Asset is depreciated until salvage value is reached
Chapter End ProblemAn item of equipment acquired on January 1 at a cost of $100,000 has an estimated life of ten years Required: Assuming that the equipment will have a salvage value of $10,000 determine the depreciation for each of the first three years by the • Straight line method• Declining balance method• Sum of the year digit method
Chapter End Problem
An item of equipment acquired on January 1 at a cost of $60,000 has an estimated use of 25,000 hours. During the first three years the equipment was used 5,000 ,6000 and 4,000 hours respectively. The estimated salvage value of the equipment is $10,000Required: Determine the depreciation for each of three years, using the unit of production method
Long-Term Assets: Leases
• Capital lease– In-substance ownership– Recorded as an asset net of amortization
Long-Term Assets: Investments
• Debt or equity securities– Held to maintain business relationship or to
exercise control• Debt classification
– Held-to-maturity carried at amortized cost– Available-for-sale carried at fair value
Long-Term Assets: Investments (cont’d)
• Equity securities– Carried at fair value– Exception: with the ability to exercise significant
influence the equity method is used: cost is adjusted for the proportionate share of the rise/fall in the retained profits of the subsidiary (investee)
Long-Term Assets: Intangibles• Goodwill
– Purchase of a business where price paid exceeds the fair value of net assets
– GAAP: not amortized; test annually for impairment• Patents
– 20 years– Amortized over shorter of legal or useful life
• Trademarks– Indefinite legal life– Not amortized; test annually for impairment
Long-Term Assets: Intangibles (cont’d)
• Franchises– Life based on contract– Amortize over shorter of legal or useful life
• Copyrights– Life of the creator plus 70 years– Amortize over shorter of legal or useful life
Liabilities• Probable future sacrifices of economic
benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the futures as a result of past transactions or events
– Current Liabilities
– Long-Term Liabilities
Current Liabilities
• Obligations whose liquidation is reasonably expected to
• Require the use of– Existing current assets– Creation of other current liabilities
• Within one year or the operating cycle, whichever is longer
Current Liabilities (cont’d)
• Payables– Short-term obligations created by the
acquisition of goods or services• Unearned Income
– Payments collected in advance of the performance of services or delivery of goods
• Other current liabilities– As circumstances warrant