EVALUATION OF DEPRECIATION METHOD USED BY MANUFACTURING FIRMS AND ITS EFFECTS ON PROFITABILITY (A CASE STUDY OF BETA GLASS PLC, UGHELLI)

EVALUATION OF DEPRECIATION METHOD USED BY MANUFACTURING FIRMS AND ITS EFFECTS ON PROFITABILITY (A CASE STUDY OF BETA GLASS PLC, UGHELLI)

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CHAPTER ONE

INTRODUCTION

1.1        Background of the Study

Most business have asset which are capital in nature e.g. building motor vehicle, furniture / fittings, etc. The cost of using these assets which benefits the business is written off to the profit and loss account over the life span of the assets is by the process called depreciation.

Depreciation is again justified is another way. The machine mentioned above contributes its quota towards productions just as an ordinary worker does and is being remunerated. The wage of such a worker is an expense to production which is charged against the trading, profit and loss account before the net profit is arrived at.

Today, it is agreed that depreciation is an expense that must be recorded whether or not revenue is sufficient to absorb it. As a result of controversial issue on depreciation in accounting many ways of evaluating depreciation have evolved.

An over view of the method of depreciation used by manufacturing fire are straight line methods, reducing balance method, sum of the year digit method, revaluation method etc.

Depreciation allows the spreading of the cost of fixed assets over their economic useful life. Depreciation is any method of attributing the historical or purchase cost of an asset across its useful life, roughly corresponding to normal wear and tear? Fixed assets are derecognized either on disposal or when economic benefit cease to accrue to a business. Therefore the only way in which costs of fixed assets are recognized in the profit and loss account is through charging depreciation.

1.2        Statement of the Research Problem

Depreciation in the value of asset is an expense. This is due to the use of asset in its provision is not optional but compulsory. It expenses is not deducted from the income of an accounting period, the ascertained profit will be wrong and will not disclose correct result of the business net profit.

But, a problem may arise in ascertaining the true profit of an organization due to the fact that there are different methods of providing for depreciation exposes in the book of the firm. The presence of those different methods may have various imparts which may lead to varieties in the reported net book value of an asset.

The use of the different depreciation methods by manufacturing firm in computing depreciation expenses bring about difference in the reported profit and net book value of assets in the balance sheet at the end of the year. This study is therefore embarked upon to investigate and report the effect of various method of depreciation on a firm net profit.

1.3        Objectives of the Study 

The major purpose of the study is to evaluate the principles of depreciation provision using different methods and how depreciation computation using different methods affects the portability of firms.

i.             Another purpose of this research work is to evaluate the impact which the various methods of depreciation provision have in the various methods of depreciation provision had in the profitability of firm.

ii.            Also, this research work will serve the purpose of evaluating how company uses depreciation to allocate the cost of a productive asset over the asset useful life.

1.4        Research Questions                  

(i.)         What are the depreciation methods uses by firms?

(ii.)        What forms the division of the firm to use particular methods?

(iii.)      To what extent can it be said that firms use different depreciation rate for different assets?

(iv.)      To what extent can it be said that there is an effect on the firm’s profitability by the different assets?

(v.)       How true can it be said that firm’s provision of depreciation really involves setting aside some money for the replacement of assets?

1.5        Significance of the Study 

(i)           This project work will be of great significant to a lot of persons. It will enable existing manufacturing firm’s to know how to match depreciation cost of productive asset ( that has a useful life of more that a year ) to the revenues earned fro using the asset

(ii)         It will enable external stakeholders to know how to access the validity of a company depreciation method by using various strategies and analytical tools.

(iii)        This study will be useful for students and persons who are interested in knowing more about the subject matter.

(iv)        This study can be basis for further study on the subject matter.

(v)         It is a ready tool for policy formulations.

1.6        Scope of the Study 

In the course of this study, the researcher was faced with some problems. Amongst such is basically financial constraints and time. However the data collected were sufficient for the purpose of this project.

1.7        Definitions of Terms

Some of the terms usually associated with depreciation in accounting may not be familiar to most people as such; some of the terms are defined below:

1.           Depreciation cost: This is the cost of an asset less residual value. The cost of an asset means the purchases price involved in acquiring the asset.

2.           Accumulated depreciation: This is the computation of any part in the time of the original cost already written off as an expense. In effects, it shows by how much the asset has fallen in value.

3.           Fixed assets: These are those assets that are capable of lasting more than one year e.g. Land and building. Furniture / fitting vehicles, plants and Machinery, etc.

4.           Tangle assets: There are those assets that can be seen and be touched and have materials existence such as stock, cash and plant etc.

5.           Scrap value: This is amount that will be realized if the asset is been dispose off (sold).

6.           Estimated useful life: This is the number of years the asset is expected to last in the business.


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