The party who uses the asset and pays the consideration is the lessee. The party who owns the asset, grants the right to use the asset, and receives consideration is the lessor. Leasing is a way to obtain the benefits of the asset without purchasing it outright. From the perspective of a lessee, it is…
Ratios used in analysing fixed assets include the fixed asset turnover ratio and several asset age ratios. The fixed asset turnover ratio (total revenue divided by average net fixed assets) reflects the relationship between total revenues and investment in PPE (property, plant, & equipment). The higher this ratio, the higher the amount of sales a…
Under IFRS, for each class of property, plant, and equipment, a company must disclose the measurement basis, the depreciation method, the useful life (or, equivalently, the depreciation rate) used, the gross carrying amount, and the accumulated depreciation at the beginning and end of the period, and a reconciliation of the carrying amount at the beginning…
Both IFRS and US GAAP require companies to write down the carrying amount of impaired assets. Impairment reversals for identifiable, long-lived assets are permitted under IFRS but typically not under US GAAP. An asset is considered to be impaired when its carrying amount exceeds its recoverable amount. Although IFRS and US GAAP define recoverability differently…
Intangible assets are non-monetary assets lacking physical substance. Intangible assets include items that involve exclusive rights, such as patents, copyrights, trademarks, and franchises. Under IFRS, identifiable intangible assets must meet three definitional criteria. They must be In addition, two recognition criteria must be met: Goodwill, which is not considered an identifiable intangible asset, arises when…
The choice of inventory valuation method affects the financial statements. The financial statement items affected include cost of sales, gross profit, net income, inventories, current assets, and total assets. Therefore, the choice of inventory valuation method also affects financial ratios that contain these items. Ratios such as current ratio, return on assets, gross profit margin,…
The allocation of the total cost of goods available for sale to cost of sales on the income statement and to ending inventory on the balance sheet varies under the different inventory valuation methods. In an environment of declining inventory unit costs and constant or increasing inventory quantities, first-in, first-out (FIFO) (in comparison with weighted…
IFRS states that inventories shall be measured (and carried on the balance sheet) at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs necessary to make the sale and estimated costs to get the inventory in condition for…
The excess of operating cash flow over capital expenditure is known generically as free cash flow. For purposes of valuing a company or its equity securities, an analyst may want to determine and use other cash flow measures, such as free cash flow to the firm (FCFF) or free cash flow to equity (FCFE). FCFF…
