Capitalization and Depreciation Research Paper Example | Topics and Well Written Essays - 1250 words

Capitalization and Depreciation - Research Paper Example If a company, for example, pays $20,000 in cash for equipment, its financial statements will not show that it spent $20,000. The statement will instead show that it converted $20,000 cash into $20,000 worth of equipment which is an asset. Expensing costs refers to reporting them on the income statements as outflows of money. When a company pays $12,000 for rent arrears, its financial statements indicate that money has been spent. Expenses decrease a companys profit or net income. The more costs businesses capitalize on rather than expense, the higher the profits they report to shareholders (Bragg 2007). GAAP refers business assets as the things the business controls or owns and have measurable economic value. When something does not fit in the description of an asset, it cannot be capitalized. Buildings, land, equipment, stocks, bonds, and items held in the inventory have future economic value that is measurable hence can be capitalized as assets. Other costs incurred in advertising, research, development, and marketing should be expensed. Although such costs are meant to produce future value, such value cannot be measured or evaluated at present (Jarnagin 2006). GAAP enables a company to capitalize the costs of acquiring assets and preparing them for use. Suppose a production company purchases a $13 million machine from a manufacturer in Italy. The company can capitalize on the buying price of the machine and also capitalize on the costs incurred in transporting the equipment from Italy. Assemblage costs, costs due to necessary modifications on the machine, taxes and tariffs paid for the equipment can be included on the capitalized costs. On smaller scale businesses, if a factory buys $98 in stock for investment intentions and pays a $1 commission, the company can capitalize on the full cost of acquisition cost: $99 (Weiss 2006). When companies capitalize on assets, it does not mean or refer

Banking Essay Example | Topics and Well Written Essays - 1500 words

Banking - Essay Example Mark Angelo, to repay the debt as well as his net asset value, in addition to the assets which Mr. Mark Angelo can offer to the bank as security against the debt . Financial Statement Analysis The financial statement analysis of Mark Equipment Pty Ltd for the present and the past year reveals the following ratios. The examination of the short-term liquidity of an organization can be accomplished through the current ratio, quick ratio and the cash ratio of the organization. The current ratio signifies the organization’s capability to meet its current liabilities and obligations comfortably. The quick ratio exhibits the capacity to meet the urgent liabilities. The cash ratio is beneficial for creditors to determine how quickly the organization can pay off its short-term debt . In this context, it can be observed that the company’s liquidity position had improved from that of the previous year, but it would be preferable if Mark Equipment Pty Ltd could increase the percentage of their current assets. The solvency of an organization can be evaluated through the debt to equity ratio. The debt to equity ratio signifies the amount of assets that were financed by debt relative to the amount financed by equity . Thus, Mark Equipment Pty Ltd had utilized comparatively lesser amount to debt to finance its assets and is less financially leveraged. The profitability of the company as indicated by the net profit margin and the return of equity as well as that on assets is very low. Therefore, it can be inferred that the company had not utilized its assets and equity proficiently4. In contrast the gross profit margin of the company is very high, implying that the company’s operating expenses are elevated. The fixed asset turnover ratio of the company indicates that it generates fairly decent value of revenue per unit currency of its fixed assets5. However, the total asset and the equity turnover ratios of the company are relatively low and have also decreased from the previous year. Consequently, the financial analysis reveals that though the company possesses decen t values of revenue as well as gross profit and