Question

1. Identify for each of the three major methods of calculating depreciation (Straight-Line, Double Declining Balance, Units of Production), a company that would likely use that method. Why would that company choose that specific method?

2. Pick two companies within the same industry. One example would be Apple and Samsung. Find the financial statements for those companies and calculate their return on assets. Which company is performing better? What do you think is causing them to perform better?

Answer 1

1) Straight Line = This method is used by companies which wants to expense off equal amount from assets each year over the useful life of asset .

Double Declining Balance= Similar to WDV (Written Down Value Method) is used by companies which runs on double shift or triple shifts and who intends to expense off major amount in initial years.

Units of Production= This method is majorly used by companies engaged in manufacturing activities.

2) Apple's ROA and ROE are currently standing at 18.91% and 33.34%, respectively. Samsung posts slightly more modest numbers, at an ROA of 15.4% and a ROE of 20%. In both cases, the ratios are above industry averages, but what makes them more meaningful is that Apple's capital structure uses very little debt. This is an area that has been troubling Samsung's investors. Samsung's most recent debt-to-total capital ratio stands at 9.08%, a sharp increase from the previous year's 5.46%. However, in terms of operational efficiency, Apple is one of the industry's worst with their 19.32 days accounts receivables worth of sales outstanding. This is because of Apple's partnerships with different data service provider providing different and less strict payment and credit policies.