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- 2011-7-11
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- 2013-8-17
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3#
发表于 2011-7-11 20:02
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take a very simplified example of a company thats starts with $100 cash financed 50/50 with debt and equity
the beginning balance sheet is
assets - 100 (cash)
liabilities
debt - 50
equity - 50
assume the company generates revenue of $1000 during year 1, cost of sales $500, purchases new equipment for $100 (10 year useful life), no taxes, no interest expenses
case 1 - expense new eqpt
the income statement is
profit = 1000-500 - 100 = 400 which flows to equity. assuming all transactions are cash based, cash will increase by the same amount
the balance sheet becomes
assets - 500 (100 begng cash + 400 cash generated during year)
liabilities
debt 50
equity 450 (50 beginning equity + 400 retained earnings for the year)
leverage ratio = 500/450 = 1.11
case 2 - capitalize new eqpt (=> only charge $10 depreciation for the year)
the income statement is
profit = 1000-500 - 10 = 490 which flows to equity.
the increase in cash is still 400 as before since accounting treatment (capitalizing vs expensing) does not impact cash flow (technically different taxes will impact cash, but we ignore taxes for this example)
the balance sheet becomes
assets -
cash 500 (100 begng cash + 400 cash generated during year)
equipment 90 (100 less 10 of accumulated depreciation)
total assets 590
liabilities
debt 50
equity 540 (50 beginning equity + 490 retained earnings for the year)
total liab + equity = 590
leverage ratio = 590/540 = 1.09
generally, both assets and equity are higher under capitalization. but equity increases by a larger % compared to the increase in assets hence the leverage ratio is lower. |
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