This assignment will be discussing depreciation, the various depreciation
methods, and their uses in determining the value of an asset over a
period, such as the straight-line method, double declining balance method,
and the sum-of-the-years method. The differences between inventory
systems...
,Table of Contents
Introduction ............................................................................................................................................ 2
Section 1.................................................................................................................................................. 2
a) Depreciation.................................................................................................................................... 2
Straight-line method ........................................................................................................................... 2
Double-declining balance method ...................................................................................................... 4
Sum-of-the-years method................................................................................................................... 5
b) Perpetual inventory ........................................................................................................................ 7
Advantages...................................................................................................................................... 7
Disadvantages ................................................................................................................................. 7
Periodic inventory system............................................................................................................... 8
Advantages...................................................................................................................................... 8
Disadvantages ................................................................................................................................. 8
c) Ratio and ratio analysis .................................................................................................................. 9
ii) Profitability ratio ............................................................................................................................. 9
iii) Liquidity ratio ............................................................................................................................. 9
Section 2................................................................................................................................................ 11
i) Horizontal balance sheet analysis .................................................................................................. 11
ii) Vertical balance sheet analysis ................................................................................................. 13
Conclusion ............................................................................................................................................. 16
Bibliography .......................................................................................................................................... 17
, Introduction
This assignment will be discussing depreciation, the various depreciation
methods, and their uses in determining the value of an asset over a
period, such as the straight-line method, double declining balance method,
and the sum-of-the-years method. The differences between inventory
systems used with a business and their advantages and disadvantages
and their use within the business. Ratios and the various types of ratio
analysis, their purposes, and their use within the business. The financial
statement analysis between two years using the horizontal and vertical
balance sheet analysis and their significant differences.
Section 1
a) Depreciation
Is the reduction in the value of a tangible asset due to it being used over a period
causing it to lose its monetary value. These tangible assets include vehicles,
buildings, equipment, machinery, and furniture (Tuovila, 2021).
Depreciation is an accounting method that calculates the reduction in the value of a
tangible asset over its useful life. Depreciation is a non-cash expense, it does not
require any cash outflow from a business. Accumulated depreciation is a contra
asset; it sums up all the years in which the depreciation of the asset has been in use.
Depreciation is a debit, as it reduces the original cost of an asset and accumulated
depreciation is a credit, it sums up all the depreciation expense charged on a
tangible asset over its useful life (Murphy, 2021).
Salvage value is the estimated amount in which an asset can be sold at the end of
its useful life. Useful life is the amount of time an asset is expected to be of some
use to the business (Tuovila, 2021).
Straight-line method
Is an accounting method that applies a fixed amount of depreciation on the asset,
each year throughout the asset’s useful life until the asset is depreciated to the same
amount as the salvage value (CFA Journal, 2021).
For example, a business buys a computer at the cost of R100 000 with a useful life
of 4 years and the estimated salvage value is R5000.
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