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1
##### Accounting – The Language of Business / How do you calculate an asset's salvage value?
« on: December 08, 2018, 12:41:13 PM »
How do you calculate an asset's salvage value?

In the calculation of depreciation expense, the salvage value of an asset is an estimated amount, and the estimated amount is often zero. With the common assumption of no salvage value, the entire cost of an asset used in a business will be depreciated over the asset's useful life.

Source: https://www.accountingcoach.com/blog/calculate-salvage-value

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##### Accounting – The Language of Business / How do you calculate an asset's salvage value?
« on: December 08, 2018, 12:40:15 PM »
How do you calculate an asset's salvage value?
In the calculation of depreciation expense, the salvage value of an asset is an estimated amount, and the estimated amount is often zero. With the common assumption of no salvage value, the entire cost of an asset used in a business will be depreciated over the asset's useful life.

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##### Financial Accounting / What is the difference between residual value, salvage value, and scrap value?
« on: December 08, 2018, 12:38:26 PM »
What is the difference between residual value, salvage value, and scrap value?
Residual value, salvage value and scrap value are three terms that refer to the expected value at the end of the useful life of the property, plant and equipment used in a business. This estimated amount is used in the calculation of an asset's depreciation expense, and often the amount is assumed to be zero.

The term residual value can also refer to the estimated value of a leased asset at the end of the lease term.

Source: https://www.accountingcoach.com/blog/residual-value-salvage-value-scrap-value

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##### Financial Accounting / How do I compute the units of production method of depreciation?
« on: December 08, 2018, 12:36:51 PM »
How do I compute the units of production method of depreciation?
The units of production method of depreciation is based on an asset's usage, activity, or parts produced instead of the passage of time. Under the units of production method, depreciation during a given year will be very high when many units are produced, and it will be very low when only a few units are produced.

To illustrate the units of production method, let's assume that a production machine has a cost of \$500,000 and its useful life is expected to end after producing 240,000 units of a component part. The salvage value at that point is expected to be \$20,000. Under the units of production method, the machine's depreciable cost of \$480,000 (\$500,000 minus \$20,000) is divided by 240,000 units, resulting in depreciation of \$2 per unit. If the machine produces 10,000 parts in the first year, the depreciation for the year will be \$20,000 (\$2 x 10,000 units). If the machine produces 50,000 parts in the next year, its depreciation will be \$100,000 (\$2 x 50,000 units). The depreciation will be calculated similarly each year until the asset's Accumulated Depreciation reaches \$480,000.

The units of production method is also referred to as the units of activity method, since the method can be used for depreciating airplanes based on air miles, cars on miles driven, photocopiers on copies made, DVDs on number of times rented, and so on.

Depreciation is an allocation technique and the units of production method might do a better job of allocating/matching an asset's cost to the proper period than the straight-line method, which is based solely on the passage of time.

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##### Financial Accounting / What is the units of activity depreciation?
« on: December 08, 2018, 12:35:58 PM »
What is the units of activity depreciation?
The units of activity depreciation is one of several methods of depreciation. The units of activity method of depreciation is unique in that a plant asset's useful life is expressed in the total units that are expected to be produced or the asset's total activity during its life. The asset's cost is then allocated to the accounting periods based on the plant asset's usage, units produced, activity, etc. Years and partial years are not relevant when using this depreciation method. (The other methods of depreciation express the plant asset's useful life in years and will allocate the plant asset's cost based on the mere passage of those years. Under these methods partial years are relevant.)

To illustrate the units of activity method of depreciation, let's assume that a company acquires a finishing machine that is expected to perform the finishing operation on a total of 100,000 units of product. The machine has a cost of \$225,000 and is expected to have a salvage value of \$25,000. Under the units of activity method, the company will record \$2 of depreciation whenever it finishes a product. The \$2 is computed as follows: (\$225,000 - \$25,000) divided by the expected 100,000 units of product. In an accounting year when 8,000 units are finished, the depreciation will be \$16,000. In a year when 23,000 units are finished, the depreciation will be \$46,000. The depreciation will continue until a total of \$200,000 of depreciation has been taken (and the book value will be \$25,000).

The units of activity method of depreciation is also referred to as the units of production method.

Source: https://www.accountingcoach.com/blog/accelerated-depreciation

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##### Financial Accounting / Are income taxes affected by accelerated depreciation?
« on: December 08, 2018, 12:33:27 PM »
Are income taxes affected by accelerated depreciation?
Using accelerated depreciation on the income tax return will mean greater depreciation expense and smaller taxable income in the earlier years of an asset's life. However, it will be followed by smaller depreciation expense and greater taxable income in the later years of the asset's life.

For a corporation with consistent taxable income, the use of accelerated depreciation on the income tax return instead of the straight-line method, will defer some income tax until the later years of an asset's life. Over the entire life of the asset, the total depreciation expense is the same. The methods merely affect the timing of the depreciation.

It is also important to note that a corporation may use the straight-line method on its financial statements and at the same time use accelerated depreciation on its income tax returns. The differences in income taxes resulting from using different methods are referred to as timing differences or temporary differences.

Source: https://www.accountingcoach.com/blog/accelerated-depreciation

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##### Financial Accounting / What is accelerated depreciation?
« on: December 08, 2018, 12:31:39 PM »
What is accelerated depreciation?
Accelerated depreciation is the allocation of a plant asset's cost in a faster manner than the straight line depreciation. Compared to straight line depreciation, accelerated depreciation will mean 1) more depreciation in the earlier years of an asset's life and 2) less depreciation in the later years of the asset's life. [Note that the total amount of depreciation over the asset's life will be the same regardless of the depreciation method used.] Hence, the difference between accelerated depreciation and straight line depreciation is the timing of the depreciation.

Three examples of accelerated depreciation methods include double-declining (200% declining) balance, 150% declining balance, and sum-of-the-years' digits (SYD).

The U.S. income tax regulations allow a business to use accelerated depreciation on its income tax return while using straight line depreciation on its financial statements. For profitable corporations this will likely result in deferred income tax payments being reported on its financial statements.

Source: https://www.accountingcoach.com/blog/what-is-accelerated-depreciation

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##### Financial Accounting / What is the double declining balance method of depreciation?
« on: December 08, 2018, 12:29:07 PM »
What is the double declining balance method of depreciation?

The double declining balance method of depreciation, also known as the 200% declining balance method of depreciation, is a common form of accelerated depreciation. Accelerated depreciation means that an asset will be depreciated faster than would be the case under the straight line method. Although the depreciation will be faster, the total depreciation over the life of the asset will not be greater than the total depreciation using the straight line method. This means that the double declining balance method will result in greater depreciation expense in each of the early years of an asset's life and smaller depreciation expense in the later years of an asset's life as compared to straight line depreciation.

Under the double declining balance method, double means twice or 200% of the straight line depreciation rate. Declining balance refers to the asset's book value or carrying value at the beginning of the accounting period. Book value is an asset's cost minus its accumulated depreciation. The asset's book value will decrease when the contra asset account Accumulated Depreciation is credited with the depreciation expense of the accounting period.

Source: https://www.accountingcoach.com/blog/double-declining-balance-method-of-depreciation

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##### Financial Accounting / Sum of the years' digits depreciation
« on: December 08, 2018, 12:27:13 PM »
Sum of the years' digits depreciation
The sum of the years' digits method is used to accelerate the recognition of depreciation. Doing so means that most of the depreciation associated with an asset is recognized in the first few years of its useful life. This method is also called the SYD method.

The method is more appropriate than the more commonly-used straight-line depreciation if an asset depreciates more quickly or has greater production ca­pacity in its earlier years than it does as it ages. The total amount of depreciation is identical no matter which depreciation method is used - the choice of depreciation method only alters the timing of depreciation recognition.

A problem with using this or any other accelerated depreciation method is that it artificially reduces the reported profit of a business over the near term. The result is excessively low profits in the near term, followed by excessively high profits in later reporting periods.

Use of the method can have an indirect impact on cash flows, since accelerated depreciation can reduce the amount of taxable income, thereby deferring income tax payments into later periods.

Use the following formula to calculate it:

Applicable percentage  =   Number of years of estimated life
remaining at the beginning of the year
SYD
source: https://www.accountingtools.com/articles/2017/5/17/sum-of-the-years-digits-depreciation

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##### Financial Accounting / What is the difference between operating cash flow and net income?
« on: December 08, 2018, 12:15:46 PM »
What is the difference between operating cash flow and net income?
Net income is earned revenues minus incurred expenses. It follows gross income and operating income and is a final monthly, quarterly or annual report. A net income statement is important for potential investors and creditors, but it does not always show the company's actual development. For instance, after a high one-time asset sale, monthly net income may be higher than operating income, followed by much lower quarterly net income.

Total cash flow is the operative cash flow plus the net working capital of the company. The net working capital is the difference between assets and liabilities. The operative cash flow reports inflows and outflows as a result of regular operating activities. The best demonstration of operating cash flow is the cash cycle, which converts accrual accounting based sales into cash.

Cash flow and net income statements are different in most cases, because there is a time gap between documented sales and actual payments. The situation is under control if the invoiced customers pay in cash during the next period. If the payments are postponed further, there is a larger difference between net income and operative cash flow statements. If the trend does not change, the annual report may demonstrate equally low total cash flow and net income.

Usually, rapidly developing companies report low net income as they invest in improvement and expansion. In the long run, high operating cash flow brings a stable net income raise, though some periods may show net income decreasing tendency.

Constant generation of cash inflow is more important for a company's success than accrual accounting. Cash flow is a better criterion and barometer of a company's financial health. Managers and investors can avoid many traps if they pay more attention to operating cash flow analyses.

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##### Financial Accounting / How do net income and operating cash flow differ?
« on: December 08, 2018, 12:13:17 PM »
How do net income and operating cash flow differ?

Net Income
Net income is calculated by subtracting cost of sales, operational expenses, depreciation, amortization, interest, and taxes from total revenue. Also called accounting profit, net income is included on the income statement along with all revenues and expenses.

Below is the income statement for Exxon Mobil Corporation (XOM) from the company's 2017 10K statement:
Revenue or Total Sales = \$237 billion (highlighted in blue).
Total costs and other deductions = \$225.68 billion (in red). Total costs include manufacturing expenses of \$34 billion, SG&A expenses of \$10.9 billion and \$19.893 billion in depreciation costs spread-out over years for the purchase of assets like property, plant, & equipment.
Profit or Net income = \$19.8 billion (green) after subtracting costs, deductions, and taxes.

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##### Financial Accounting / What factors decrease cash flow from operating activities?
« on: December 08, 2018, 12:10:38 PM »
What factors decrease cash flow from operating activities?
1. Dwindling Net Income
2. Declining Sales or Margin Compression
3. Changes in Working Capital

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##### Financial Accounting / Three Types of Cash Flow Activities
« on: December 08, 2018, 12:03:12 PM »
Three Types of Cash Flow Activities
Operating activities include cash activities related to net income. For example, cash generated from the sale of goods (revenue) and cash paid for merchandise (expense) are operating activities because revenues and expenses are included in net income.
Investing activities include cash activities related to noncurrent assets. Noncurrent assets include (1) long-term investments; (2) property, plant, and equipment; and (3) the principal amount of loans made to other entities. For example, cash generated from the sale of land and cash paid for an investment in another company are included in this category. (Note that interest received from loans is included in operating activities.)
Financing activities include cash activities related to noncurrent liabilities and owners’ equity. Noncurrent liabilities and owners’ equity items include (1) the principal amount of long-term debt, (2) stock sales and repurchases, and (3) dividend payments. (Note that interest paid on long-term debt is included in operating activities.)

Source: https://saylordotorg.github.io/text_managerial-accounting/s16-02-three-types-of-cash-flow-activ.html

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##### Financial Accounting / Why should an investor understand accounting?
« on: December 02, 2018, 03:27:12 PM »
Why should an investor understand accounting?
Learning How a Company Finances Their Operations

Another question that business accounting helps answer relates to the mix of debt and equity used to finance a company's operations. The ability to identify debt and equity is crucial in determining the company's value since the debt-to-equity ratio is commonly used in measuring a company's idiosyncratic risk. Although most information on debt and equity comes from the balance sheet, certain debt items require further digging and deep knowledge of business accounting.

For example, companies often choose to lease property instead of buying it. Under the U.S. GAAP, operating leases are not required to be included as a liability. However, operating lease payments are akin to debt payments, and investors may wish to treat the present value of operating leases as debt.

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##### Financial Accounting / How should a change in accounting principle be recorded and reported?
« on: December 02, 2018, 03:24:53 PM »
How should a change in accounting principle be recorded and reported?

Recording and Reporting Change in Accounting Principle

Whenever a change in principle is made by a company, the company must retrospectively apply the change to all prior reporting periods, as if the new principle had always been in place, unless it is impractical to do so. This is known as "restating." Keep in mind that these requirements only impact direct effects, not indirect effects.

If the adoption of a new accounting principle results in a material change in an asset or liability, the adjustment must be reported to the retained earnings' opening balance. Additionally, the nature of any change in accounting principle must be disclosed in the footnotes of financial statements, along with the rationale used to justify the change. The FASB issues statements about accounting changes and error corrections that detail how to reflect changes in financial reports.