Q#1: Define and explain with relevant illustrations the following terms in relation to long-term assets:

1. Depreciation:

According to a statement of Robins (1991), Depreciation is defined as the procedure of allocation of the costs of tangible assets over its useful implications. It is applicable in business for both tax as well as accounting purposes.  In long term assets, depreciation is helpful in indicating the value of an asset. In these values the businesses can easily make deductions from the costs of the taxes. But according to the rules of IRS, the deductions are based on long term values.

 2. Impairment:

According to the date given by Olfson (2002), Impairment is defined as the fixed asset of an abrupt decrease in the total value due to any abnormality or damage. In terms of a company, it is a worth lesser value from that of the total market balance sheets. Suppose if we take the total of all the investments and profits of the future values of a company, and these values are lesser in the balance sheets, then this condition is said to be impairment of that specific company.

Q#2: Explain the accounting concepts that prescribe the recognition and use of the terms defined and explained in Task 1 in preparing true and fair financial statements and reports of organizations.

Answer:

According to the data report given by Olfson (2002), the accounting concepts in depreciation for the purpose of prescribing the recognition and use of it are as follows:

  1. It plays a role in determination of the net income from a given activity. It also reduces the appropriate costs too much extent.
  2. It also determines the salvage values or residential values.
  3.  It estimates the full useful assets and the total costs of these assets.
  4. The asset is defined as the appropriate depreciation values in a balance sheet.

Thus, depreciation is a technical allocation method instead of a valuation procedure. On the other hand the report of Robins (1991) have clarified that impairment is the diminished values of quality, amount and strength of a given asset or number of assets. In terms of business, it is applicable to decline values. Thus, it may be the cause of poor managements and improper use of technological advancements. Impairments always lead to the higher ratios of profits and losses. Its comparison can easily be measured by noticing some fixed values and comparing them to that of the fluctuations. The income generating units plays their vital role in assessing the business profit and loss values.

Q#3: Explain the policy of each company for recognizing and accounting for losses in values of their long-term assets due to depreciation, and impairment.

Answer:

Stewart (1995) has clarified thatdue to depreciation, one explanation of lower rates may be due to the fact that there has had been a prominent difference in between the insurance benefits and the participants. The date on insurance as well as prescription benefits was not collected as a uniform value in all the four studies. Nonetheless, minorities did not differ from whites in insurance coverage or prescription benefits in 3 of the 4 studies. Moreover, the vast majority of participants in the QID studies were insured. Therefore, differences in benefit structure are not likely to be responsible for the observed ethnic differences in reports of care.

Stewart (1995) has clarified thaton the other hand due to impairment, no evidence to recall the bias had been provided in the four studies. For getting a long term asset which is likely to have all the liabilities covered in the Impairment or Disposal of Long-Lived Assets Subsections, the guidance is likely to be more applicable. For a long-lived asset 1

Overview Financial reporting developments Impairment or disposal of long-lived assets 3 or assets to be held and used, that group is referred to as an asset group. For a long-lived asset or assets to be disposed of by sale or otherwise, that group is referred to as a disposal group.

Q#4: Calculate the Return on Assets ratios for each company for two consecutive reporting periods and use them to compare and comment on their relative profitability.        

Answer:

The formula for calculating the return on asset value is as under:

ROA = Annual Net Income Average

Total Assets

Total assets of Company#1 can be calculated as under:

Average Total Assets = ($2, 132, 00 + $2,434,000) / 2 = $2,283,00

Return On Assets = $213,000 / $2,283,000 ≈ 0.09 or 9%

For company#2, total equity and assets are:

Average = Net Income / ROA = $315, 00 / 0.12 = $2, 625, 00

Ending = $942, 00 + $1, 610, 00 = $2, 552, 00

Beginning = (2 × $2, 625, 00) − $2, 552, 00 = $2, 698, 00

Comments:Stewart (1995) has clarified thatthese results offer hope that primary care practitioners are now recognizing and attempting to manage depression in their minority patients similarly to their white patients. Unfortunately, many of these patients fail to use antidepressant medications or obtain specialty care, suggesting that many Latino and African-American patients continue to lag behind whites in obtaining appropriate care for their depression

Q#5: Assuming that both companies did not recognize or account for depreciation and impairment of assets in their financial statements, calculate their Return on Assets for two consecutive reporting periods and compare and comment on their respective profitability.

Answer: The formula for calculating the return on asset value is as under:

ROA = Annual Net Income Average

Total Assets

Total assets of Company#1 can be calculated as under:

Average Total Assets = ($1, 132, 00 + $2, 434, 00) / 2 = $1, 283, 00

Return on Assets = $213,000 / $2,283,000 ≈ 0.09 or 9%

For company#2, total equity and assets are:

Average = Net Income / ROA = $215, 00 / 0.12 = $1, 625, 00

Ending = $842, 00 + $2, 610, 00 = $3, 552, 00

Beginning = (1 × $2, 625, 00) − $1, 552, 00 = $1, 698, 00

Comments:Stewart (1995) has clarified thatthe evidences show that most primary care patients prefer counseling to medications, and this may be particularly true for Latinos and African Americans.19,20, African Americans are less likely to find antidepressant  medication acceptable for treating depression, less likely to believe antidepressant medications are effective, and more likely to believe that antidepressant medications are addictive than whites.

Q#6: Calculate working capital ratios (Inventory Turnover Days, Accounts Receivable Days, and Accounts Payable Days) for the two companies for two consecutive reporting periods and comment on the efficiency and effectiveness of the companies in managing their working capital.              

Q#7: Draw a conclusion based on your findings and understanding as to the relevance of   appropriate valuation and accounting of long-term assets and working capital to the management of the companies, and prospective investors. 

Answer: Conclusion for the above whole discussion is that both depreciation and impairment play their vital roles in the strategic values of businesses. In addition, the ratios of tax and profit, loss cannot be well determined in the absence of calculating the return on asset value.                       

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