The appreciation or depreciation of a particular currency is not the result of a single factor i.
Share Loading the player So investors need to exercise judgment when examining numbers on financial statements. It's not enough to know simply whether a company has, say, great-looking earnings per share or low book value.
Investors need to be aware of the assumptions and accounting methods that produce the figures. Introduction To Fundamental Analysis Here we look at how to achieve this awareness when analyzing depreciationwhich can represent a big portion of the expenses found on a company's income statementand which can impact the value of the investment opportunity in the short term.
While there are rules governing how depreciation is expensed, there is still plenty of room for management to make creative accounting decisions that can mislead investors.
It pays to examine depreciation closely. Depreciation is the process by which a company allocates an asset's cost over the duration of its useful life.
Each time a company prepares its financial statements, it records a depreciation expense to allocate a portion of the cost of the buildings, machines or equipment it has purchased to the current fiscal year.
The purpose of recording depreciation as an expense is to spread the initial price of the asset over its useful life. For intangible assets - such as brands and intellectual property - this process of allocating costs over time is called amortization.
For natural resources - such as minerals, timber and oil reserves - it's called depletion. Assumptions Critical assumptions about expensing depreciation are left to the company's management. Management makes the call on the following things: Method and rate of depreciation Useful life of the asset Scrap value of the asset Calculation Choices Depending on their own preferences, companies are free to choose from several methods to calculate the depreciation expense.
To keep things simple, we'll summarize the two most common methods: Straight-line method - This takes an estimated scrap value of the asset at the end of its life and subtracts it from its original cost.
This result is then divided by management's estimate of the number of useful years of the asset. The company expenses the same amount of depreciation each year.
Here is the formula for the straight-line method: Generally, the purpose behind this is to minimize taxable income. A popular method is the 'double declining balance', which essentially doubles the rate of depreciation of the straight-line method: According to the straight-line depreciation method, Tricky's depreciation expense in the first year after buying the IT system would be calculated as the following: That means there is an impact on earnings.
If Tricky is looking to cut costs and boost earnings per share, it will choose the straight-line method, which will boost its bottom line. A lot of investors believe that book value, or net asset value NAVoffers a fairly precise and unbiased valuation metric. But, again, be careful.
Management's choice of depreciation method can also significantly impact book value: As a result, since the value of net assets doesn't shrink as quickly, straight-line depreciation gives Tricky a bigger book value than the value a faster rate would give.
Learn more about these methods of depreciation in Depreciation: Information technology typically becomes obsolete quite quickly, so most companies depreciate information technology over a shorter period, say, five to eight years.
Then there's the issue of the scrap value that Tricky chose. It's hard to trust that a used, five-year-old system would fetch a quarter of its original value. But perhaps we can see the reason for Tricky's decision: And a lower depreciation raises reported earnings and boosts book value.
Tricky's assumptions, while questionable, will improve the appearance of its fundamentals. Conclusion A closer look at depreciation should remind investors that improvements in earnings per share and book value can, in some cases, result from little more than strokes of the pen.
Earnings and net asset value that are boosted thanks to the choice of depreciation assumptions have nothing to do with improved business performance, and, in turn, don't signal strong long-term fundamentals. Trading Center Want to learn how to invest? Get a free 10 week email series that will teach you how to start investing.
Delivered twice a week, straight to your inbox.Introduction to Exchange Rates and the Foreign Exchange Market 1. Refer to the exchange rates given in the following table. a. Compute the U.S. dollar–yen exchange rate, E, and the U.S.
dollar–Canadian. The Canadian dollar has depreciated these past few months. The recent dip in its exchange rate vis-à-vis stronger currencies was caused by a cut to its key interest rate by the Bank of Canada, as discussed in the previous part of this series.
Meanwhile, there are other reasons that have added to the decline in the loonie’s value. Accounting for the sensitivity to the oil portfolio improves the tracking of the Canadian dollar exchange rate after , precisely when oil prices are falling.
Systematic and Domestic Variations in the Canadian Dollar. Using systematic variations to explain the depreciation of the Canadian dollar provides a very good fit. Depreciation of the Canadian dollar will d_____ the affected price of exports and cause exports to rise and imports too far.
decrease Changes in the demand for the Canadian dollar comes from. Canadian dollar in – can be attributed to the oil portfolio, even if this depreciation coincided with a sharp decline in oil prices. Other types of systematic variationplayed a dominant role, most.
The sharp depreciation of the Canadian dollar and the successful launch of the euro have spawned an animated debate in Canada about the potential benefits of .