DIGESTING FINANCIAL STATEMENTS: LONG-LASTING ASSETS
Long-lived assets, also known as non-current assets, is any asset a company expects to keep for at least one year. Such assets are expected to boost the business in one way or another. But not all long-standing assets are bought by the entity. There are times firm offset the purchase.
Remember the three terms for allotment of capitalized assets: amortization, depletion, and depreciation. Amortization is for goodwill, depletion for natural resources, and depreciation for a factory or plant. Depreciation tends to be beguiling since it refers to the allocation of a previous capital expense to an annual expenditure.
Although it impacts the reported revenues. However, some analysts prefer EBITDA over depreciation, as the latter is a non-cash cost charge. But we cannot simply exclude depreciation from the equation as it allots a particular amount for maintaining and replacing fixed assets.
Depreciation, in some instances, is called economic depreciation. This adjusted depreciation signifies the real amount an entity needs to determine yearly allocation. In essence, economic depreciation balances erroneous items in both directions. It also helps to assimilate the underlying trend in the asset base to find out whether the business is bolstering or slashing the investment in that base.
One can consider different schemes for accounting investments. Before doing so, you need to remember the following about investment returns: cash dividends, gains or losses, and investment income. If a firm holds over 50% of the shares of another company, all of their accounts are consolidated. If a company owns less than 50% of the shares, the three methods are used for knowing an investment’s worth.
Cost - If an entity has to hold the asset until sale or ready market price is available
Equity - A parent firm holding 20%-50% of the asset has considerable influence over the investment
Market - The asset can be traded or sold by a trading firm
Assets that pay dividends are indicated in the income statement. But the parent firm may or may not outline the earnings, gains or losses from dividend-paying investments.
When an entity acquired another firm, all the assets and liabilities of the target firm are appraised again to the expected fair value. For accountants, goodwill is the excessive amount the buying company pays for its company to be purchased. It is important to look for any trace of impairments in goodwill.
We shall study long-lasting liabilities in the next tutorial.
Digesting Financial Statements: Long-Lasting Liabilities
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