return on capital

Examples of return on capital in the following topics:

• Accounting Methodologies: Amortized Cost, Fair Value, and Equity

  • subjective factors such as risk characteristics, cost of and return on capital and individually perceived utility.

• Working Capital Management Analysis

  • A company can be endowed with assets and profitability but short on liquidity if its assets cannot be converted into cash .
  • Decisions relating to working capital and short term financing are referred to as working capital management.
  • Working capital management entails short-term decisions, usually relating to the next one-year period and are based in part on cash flows and/or profitability.
  • Profitability can be evaluated by looking at return on capital (ROC).
  • If money grew on trees, companies would never have a working capital shortage.

• Debt-to-Equity Ratio

  • Each form of raising capital has its own set of pros and cons.
  • Interest payments on debt are tax deductible, while dividends on equity are not.
  • Returns to purchasers of debt are limited to agreed- upon terms (i.e., interest rates), however, they have greater legal protection in the event of a bankruptcy.
  • The returns an equity holder can achieve have unlimited upside, however, they are typically the last to be paid in the event of a bankruptcy.
  • Calculating a company's debt to equity ratio is straight forward, and the debt and equity components can be found on a company's respective balance sheet.

• Return on Assets

  • The Return on Total Assets ratio measures how effectively a company uses its assets to generate its net income.
  • The Return on Total Assets ratio is similar to the Asset Turnover Ratio in that both measure how effective a business's assets are in generating returns for the business.
  • But while the asset turnover ratio is focused on the business's sales, return on assets is focused on net income.
  • $Return\quad on\quad Total\quad Fixed\quad Assets\quad =\quad \frac { Net\quad Income }{ Average\quad of\quad Fixed\quad Assets }$
  • However, merely determining a business's return on asset ratio is insufficient to get a good understanding on how a business is doing.

• Cost of Improvements

  • The cost of an asset improvement is capitalized and added to the asset's historical cost on the balance sheet.
  • The cost of the improvement is capitalized and added to the asset's historical cost on the balance sheet.
  • Capital improvements should not be confused with regular maintenance expenses to maintain an asset's functionality, which are regarded as period costs that are expensed on the income statement and reduce income for the period.
  • Asset improvements are capitalized and reported on the balance sheet because they are for expenses that will provide a benefit beyond the current accounting period.
  • For example, costs expended to place the company logo on a delivery truck or to expand the space on a warehouse would be capitalized because the value they provide will extend into future accounting periods.

• Cost of Goods Sold and Gross Profit

  • Costs are associated with particular goods by using one of several formulas, including specific identification, first-in-first-out (FIFO), or average cost.
  • When the goods are bought or produced, the costs associated with such goods are capitalized as part of inventory (or stock) of goods.

• Characteristics of Bonds

  • short term (bills): maturities between one to five year (instruments with maturities less than one year are called money market instruments)
  • The yield is the rate of return received from investing in the bond.
  • It can also refer to the yield to maturity or redemption yield, which is a more useful measure of the return of the bond, taking into account the current market price, and the amount and timing of all remaining coupon payments and of the repayment due on maturity.
  • It is equivalent to the internal rate of return of a bond.
  • This will depend on a wide range of factors.

• Accounting Perspectives on Long-Lived Assets

  • All money that is spent to get the asset up and running is capitalized as part as the cost of the asset.
  • The basic rule here is that—when recognizing the asset is allowed—all money that is spent to get the asset up and running is capitalized as part as the cost of the asset.
  • Items that can be capitalized when the firm purchases a machine include the machine itself, transportation, getting the machine in place, fees paid for having the machine installed and tested, the cost of a trial run, and alike.
  • Examples that are excluded from the asset, and consequently are expense rather than capital costs, include the training of personnel to learn how to use the machine, unexpected damages while installing the machine, or the drinks and snacks to celebrate the machine's successful launch.
  • Items spent to get the asset up and running is capitalized as part as the cost of the asset.

• Analyzing Intangible Assets

  • Those with identifiable useful lives are amortized on a straight-line basis over their economic or legal life, whichever one is shorter.
  • Some costs with respect to intangible assets must be capitalized rather than treated as deductible expenses.
  • For example, an amount paid to obtain a trademark must be capitalized.
  • Certain amounts paid to facilitate these transactions are also capitalized.
  • The regulations contain many provisions intended to make it easier to determine when capitalization is required.

• Recognition of Revenue at Point of Sale or Delivery

  • Since most sales are made using credit rather than cash, the revenue on the sale is still recognized if collection of payment is reasonably assured.
  • If a company cannot reasonably estimate the amount of future returns and/or has extremely high rates of returns on sales, they should recognize revenues only when the right of return expires.
  • Those companies that can estimate the number of future returns and have a relatively small return rate can recognize revenues at the point of sale, but must deduct estimated future returns.