Appunti International Accounting

SYD:

- Year 1: 10,000 × 5/15= 3,333

- Year 2: 10,000 × 4/15= 2,667

- Year 3: 10,000 × 3/15= 2,000

- Year 4: 10,000 × 2/15= 1,333

- Year 5: 10,000 × 1/15= 667

!! Nel caso, in cui io acquistassi qualcosa in un certo mese dell’anno (es. maggio 2016) e

devo calcolare la depreciation solo del 2017, oltre al calcolo della depreciation devo

moltiplicare anche i mesi appartenenti al 2017, in quanto se ho acquistato qualcosa a

maggio del 2016, tutti i primi 8 mesi non mi interessano, quindi moltiplico 4mesi/12 ossia 1/3

Example:

Company X purchased machinery for 279,000 $ on May 1, 2016. It is estimated that it will

have a useful life of 10 years, residual value of 15,000 $, production of 240,000 units and

working hours of 25,000. During 2017 Company X uses the machinery for 2,650 hours, and

the machinery produces 25,500 units.

Calculate Sum of the years’ digits Depreciation Method:

- 10 /55 X $264,000 X 1/3 = $ 16,000

- 9 /55 X $264,000 X 2/3 = $ 28,800

Double Declining-Balance Method (DDB)

This is an accelerated depreciation method that doubles the rate of declining balance

depreciation. It applies a higher depreciation rate in the earlier years of the asset's

useful life. Useful for assets that rapidly lose their value in the initial years, like computers or

equipment.

The Double Declining Balance (DDB) is a common form of this method, where the

depreciation rate is double what it would be under the Straight-Line Method.

How it Works:

1. Determine the depreciation rate by dividing 1 by the useful life of the asset. For

example, if an asset has a 5-year life, the straight-line depreciation rate would be

1/5=20%

2. Double the rate for DDB. Here, the rate would be 20%×2=40%

3. Calculate depreciation each year by applying the rate to the book value at the

beginning of each year. Subtract each year’s depreciation from the asset’s book

value to get the new book value.

Formula:

Depreciation Expense = Book Value at Beginning of Year × Depreciation Rate

In the first year, you apply the depreciation rate to the full cost of the asset.

In subsequent years, you apply the depreciation rate to the book value (remaining value

after depreciation) from the previous year.

Example 1

A machine is purchased for $10,000 with a 20% declining balance rate (1/useful life and

double it)

In the first year, depreciation = 10,000 × 20% = 2,000

In the second year, depreciation = 8,000 × 20% = 1,600

In the third year, depreciation = 6,400 x 20% = 1,280 and so on.

6. Ratios

A ratio is a numerical relationship between two quantities. In financial analysis, ratios are

used to compare different pieces of financial information from a company's financial

statements (like the balance sheet or income statement). These ratios help assess aspects

such as liquidity, profitability, efficiency, and solvency of the business.

Ratio Analysis is the process of evaluating relationships between various financial variables

by calculating ratios from financial statements. It allows stakeholders—such as investors,

analysts, and managers—to assess a company’s financial performance, make comparisons

across companies, and monitor changes over time.

We can classify ratios based on the type of information the ratio provides:

1) Liquidity;

2) Profitability;

3) Solvency;

4) Activity;

LIQUIDITY

Liquidity ratios assess how well a company can meet its short-term obligations using its

current assets, especially those that can be quickly converted into cash. (To check the

financial health)

● Current Ratio:

Current Ratio = Current Assets / Current Liabilities

Ability to meet short-term obligations with current assets (assets expected to be converted

into cash within a year).

< 1: poor liquidity management or operational inefficiencies. The company may face

liquidity issues > may not have enough cash or near-cash resources to pay off its short-term

debts and might need to rely on external financing, like borrowing or raising equity.

Inventory needs to be sold to generate cash. If sales are slow, liquidity issues arise.

Accounts Receivable represents money owed by customers, which can take time to collect.

If the company cannot convert these into cash quickly enough, it might fail to pay its

creditors on time.

Ex. the current ratio of 0.8 means that for every $1 of liabilities, the company only has

$0.80 of assets it can quickly access or convert into cash.

Ideally between 1.5 and 2

significantly > 1: excess inventory (it might not be selling as quickly as expected). This

leads to increased storage costs, and obsolete inventory may become a liability. Excessive

current assets could mean the company is not using them effectively to generate revenue

> inefficiency in managing assets or capital > too many resources in liquid rather than

using them to generate returns or growth.

!!

If Current Ratio > Quick Ratio, the company is relying on inventory to cover its short-term

liabilities. In this case I should calculate Days Inventory Outstanding.

DIO = Inventory / average day’s COGS

This means the company has a significant amount of inventory that may not be easily

converted into cash quickly. To understand the extent of this issue, you calculate DIO to see

how long the inventory takes to sell > If inventory isn’t sold quickly, this could create liquidity

problems because its inventory is slow-moving and may not be easily converted into cash,

despite having a positive Current Ratio.

If Current Ratio = Quick Ratio, the company has relatively low inventory levels

compared to other current assets > company is not overly reliant on inventory to meet its

obligations, which might be a sign of good liquidity management.

● Quick Ratio (Acid-Test Ratio)

Quick Ratio = (Cash + Short-term Investments + Receivables​) / Current

Liabilities

Ability to meet short-term obligations using only the most liquid assets (excluding

inventory).

< 1: does not have enough liquid assets to cover its current liabilities. It indicates that the

company may need to rely on its inventory or other non-liquid assets to meet short-term

obligations. This could signal cash flow difficulties or the need to sell off assets quickly

to raise money, which can disrupt the company’s operations and increase financial risk.

> 1: Companies can meet short-term debts without selling inventory. This suggests a

comfortable liquidity position, where current assets sufficiently cover current liabilities.

> 1 but close: Healthy liquidity, but should monitor for changes. A small dip in current assets

or an increase in liabilities could quickly cause liquidity issues.

● Cash Ratio:

Cash Ratio = (Cash + Short-term investment) / ​Current Liabilities

Ability to pay off short-term liabilities using only cash and short-term investment.

> 1 suggests that a company is highly liquid and has strong cash reserves to meet its

short-term debts, but it could also mean the company isn’t using its cash efficiently for

growth or investment.

< 1 might indicate that the company relies more on receivables or inventory to meet

obligations, which could lead to liquidity issues, especially if there are delays in payments

from customers or a slow-moving inventory.

< 0.5 is common because many companies don’t keep large amounts of cash on hand.

Instead, they often rely on accounts receivable (money owed by customers) and inventory

to meet short-term obligations. These assets are less liquid than cash but still useful for

fulfilling obligations.

If the Quick Ratio > Cash Ratio, it means a significant part of the company’s short-term

liquidity comes from receivables, not cash. This could be risky because receivables are not

guaranteed and timing is uncertain. A higher Quick Ratio than Cash Ratio is fine only if

receivables are collected quickly (a low DSO).

You should calculate Days Sales Outstanding (DSO) when the Quick Ratio is significantly

higher than the Cash Ratio to evaluate the company's dependence on receivables and the

risk it poses to liquidity

Days Sales Outstanding = Receivables / Average day’s revenues

Companies typically aim for DSO between 30–45 days.

PROFITABILITY

Profitability ratios assess how well a company generates profit from its operations.

Margins and return ratios provide information on the profitability of a company and the

efficiency of the company.

Margin ratios focus on the profitability of a company relative to its sales or revenue. These

ratios show how much profit a company is able to generate from its revenue after specific

costs are deducted.

1. Gross Profit Margin:

This ratio measures how much money a company keeps from its sales after covering the

cost of producing its goods or services (COGS).

Gross Profit Margin = Gross Profit / Revenue

Gross Profit = Revenues - COGS

Higher margin indicates the company is efficiently managing its production costs

(materials, labor, etc.) relative to the revenue it generates > company retains more money

from each dollar of sales to cover operating expenses and profit > suggests a strong

pricing power since the company can sell its products or services at a premium price, often

due to strong brand positioning or high demand. With more profit available after

production costs, the company has greater flexibility to invest in growth, absorb

economic shocks, or compete effectively.

Lower margin suggests that production costs may be eating into profits, or the company

might not have enough pricing power. If the company faces competitive pressures and

cannot raise prices (e.g., in a price-sensitive market), its margin shrinks > reduced pricing

power could stem from economic downturns, increased competition, or lack of product

differentiation > Inefficient production processes, waste, or poor supplier management

could lead to higher COGS, reducing the gross profit margin.

If it decreases, it could indicate rising production costs, reduced pricing power, meaning

the company is unable to increase prices despite rising costs or market pressure and

inefficiencies in the production process.

!! - GPM alto, OPM basso: company is managing its production costs well, but is facing

issues with its operating expenses. This could mean the company is having trouble

controlling expenses related to overheads such as marketing, administration, and

other non-production-related costs.

- Entrambi bassi: L'azienda ha problemi sia nei costi di produzione che nelle spese

operative, indicando inefficienza generale.

- Entrambi alti: L'azienda gestisce bene sia i costi di produzione che le spese

operative, mostrando una buona efficienza complessiva.

2. Operating Profit Margin also called EBIT (con non-operating activities)

This ratio shows how efficiently a company is managing its core operations. It focuses on the

profit a company makes from its main business activities, befo