The Difference Between The Cost Of A Depreciable Asset

The Difference Between The Cost Of A Depreciable Asse

The assignment involves understanding key accounting concepts related to depreciation, investments, cash flow reporting, and corporate financial practices. As such, the core questions encompass the calculation of depreciation, analysis of investments and their impact on net income, classification in financial statements, and understanding corporate financial processes and fraud factors.

Specifically, the tasks include defining the accounting term for the difference between a depreciable asset's cost and its accumulated depreciation; analyzing investment income from holdings, including dividend income and net income reporting; identifying how certain items should be classified in the statement of cash flows under the indirect method; recognizing non-methods of accounting for stock investments; understanding adjustments to net income in cash flow statements; explaining the closing process of a corporation’s books; comparing financial data for competitive analysis; calculating straight-line depreciation; identifying entities in corporate structures; analyzing factors contributing to financial fraud; and interpreting account balances for specific companies.

Paper For Above instruction

Understanding the intricacies of depreciation is fundamental in accounting. The difference between the cost of a depreciable asset and its related accumulated depreciation is known as the book value or carrying amount of the asset. This figure is essential for financial reporting because it reflects the asset's net worth on the books after accounting for wear and tear or usage (Kieso, Weygandt, & Warfield, 2019). The proper calculation and presentation of this figure influence asset valuation and depreciation expense reporting and are crucial in asset management and financial analysis.

Investment accounting, particularly for stakeholdings such as a 10% interest in Potter Corporation, involves recognition of dividend income and share of profit. When Nance Company owns a significant but not controlling stake, it can use the equity method, which recognizes dividends as a reduction in the investment account and recognizes the investor's share of net income in the income statement (Gibson, 2020). Therefore, Nance's investment in Potter increases Nance’s net income indirectly by its share of Potter’s earnings—specifically, 10% of $200,000, which is $20,000. The dividend of $30,000 paid by Potter further reduces the carrying amount of the investment (Brigham & Houston, 2021). This nuanced understanding clarifies how investments influence net income and asset valuation.

Classifying items within the statement of cash flows under the indirect method involves differentiating operating activities, investing activities, and financing activities. For example, depreciation expense is added back to net income because it is a non-cash expense; gains or losses on sales of assets are adjusted similarly. An understanding of these classifications enables accurate cash flow reporting, which is vital for assessing a company's liquidity and operational efficiency (White, Sondhi, & Fried, 2019). Recognizing which items are non-cash or financing related enhances transparency and interpretability of financial statements.

There are various methods of accounting for stock investments, including cost, equity, and fair value methods. However, not all methods are appropriate in every circumstance. For instance, the cost method applies when the investor lacks significant influence; the equity method applies when significant influence exists; the fair value method is used for trading securities. A method not recognized in accounting standards would fall outside these accepted practices and could lead to inaccurate financial reporting (Higgins, 2020).

Adjustments to net income when preparing the statement of cash flows under the indirect method typically involve adding back depreciation and amortization, adjusting for gains or losses on asset sales, and changes in working capital. However, some transactions, like paying dividends or issuing stock, do not adjust net income but are reported in financing activities (Kieso et al., 2019). Identifying which adjustments are appropriate ensures accurate reflection of cash flows and financial health.

Closing the books of a corporation involves the process of transferring temporary account balances—revenues, expenses, and dividends—to retained earnings through closing entries. This process resets these accounts for the new accounting period, ensuring that each period's financial statements are accurate and independent. Proper closing procedures uphold the integrity of financial reporting (Gibson, 2020).

Comparing a company with other organizations to assess its competitive position is commonly known as benchmarking. Benchmarking involves analyzing key financial ratios, operational metrics, and market position to identify strengths and weaknesses relative to peers. This comparison provides valuable insights for strategic decision-making and performance improvement (Kaplan & Norton, 2008).

In asset management, specifically for equipment purchased by Mitchell Corporation, depreciation using the straight-line method involves allocating the depreciable amount—cost minus salvage value—equally over the asset's useful life. Given an initial cost of $120,000, salvage value of $20,000, and a 6-year lifespan, the annual depreciation expense is calculated as ($120,000 - $20,000) / 6 = $16,667 per year (Horngren, Sundem, & Elliott, 2018). This systematic allocation helps match expenses with revenues appropriately.

The company whose stock is owned by a parent corporation is termed a subsidiary. Recognizing subsidiaries' financials is critical for consolidating financial statements and presenting an accurate view of the parent company's financial position (Higgins, 2020).

Fraudulent activity in corporations may be driven by various factors such as pressure to meet financial targets, opportunity due to weak controls, and rationalization by employees. A well-documented main factor contributing to fraud is management's incentive or pressure, which compels individuals to manipulate financial statements to meet desired goals (Cumming & Johan, 2015). Other factors include lack of oversight and a corporate culture that implicitly accepts unethical behavior.

Regarding account balances of Marvin Services Corporation, analyzing the specific accounts allows for assessing financial health. For example, accounts payable, receivables, and retained earnings offer insights into liquidity and profitability, which are instrumental for decision-making and performance evaluation.

References

• Brigham, E. F., & Houston, J. F. (2021). Fundamentals of financial management (15th ed.). Cengage Learning.
• Cumming, D., & Johan, S. (2015). Agency problem and corporate fraud. Journal of Business Ethics, 132(4), 787-801.
• Gibson, C. H. (2020). Financial reporting & analysis (13th ed.). Cengage Learning.
• Higgins, R. C. (2020). Analysis for financial management (12th ed.). McGraw-Hill Education.
• Horngren, C. T., Sundem, G. L., & Elliott, J. A. (2018). Introduction to financial accounting (11th ed.). Pearson.
• Kaplan, R. S., & Norton, D. P. (2008). The balanced scorecard: Translating strategy into action. Harvard Business Press.
• Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate accounting (16th ed.). Wiley.
• White, G. I., Sondhi, A. C., & Fried, D. (2019). The analysis and use of financial statements (3rd ed.). Wiley.