Capital vs. Expense Flashcards
(28 cards)
What is a fixed asset?
A long-term tangible piece of property owned by the company used in the production of income, not expected to be consumed or converted into cash within one year.
Fixed assets are crucial for a company’s operations and income generation.
What items are included in fixed assets?
- Buildings
- Real estate
- Machinery and equipment
- Furniture and office equipment
- Computer hardware and software
These items are essential for the company’s operational capabilities.
True or False: Intangible long-term assets such as trademarks and patents are categorized as fixed assets.
False
Intangible long-term assets are referred to as ‘fixed intangible assets’.
Fill in the blank: Fixed assets are sometimes collectively referred to as _______.
plant
This term encompasses the physical assets used in production.
What is the expected timeframe for fixed assets to be consumed or converted into cash?
At least one year
This distinguishes fixed assets from current assets.
What does GPM stand for?
Global Project Methodology
GPM is the global workflow process for managing capital and expense projects within Dow.
How many stages are identified in the Global Project Methodology?
Four stages
The stages include Project Identification, Project Definition, Project Design/Construction, and Project Start-up and Closure.
What occurs during Stage 1 of the Global Project Methodology?
Project Identification – generally costs are expensed
This stage focuses on identifying projects and typically involves expensing costs.
What happens during Stage 2 of the Global Project Methodology?
Project Definition – spending usually becomes part of the capital project and ultimately the fixed asset
In this stage, spending is categorized as part of the capital project.
What is the focus of Stage 3 in the Global Project Methodology?
Project Design/Construction – spending usually becomes part of the capital project and ultimately the fixed asset
This stage involves the design and construction phases, integrating spending into the capital project.
What does Stage 4 of the Global Project Methodology encompass?
Project Start-up and Closure – includes both expense and capital
This stage covers the finalization of projects, addressing both start-up expenses and capital costs.
Items defined as fixed assets that have an acquisition cost of ________ or more
and a life expectancy of more than one year are __________.
Items defined as fixed assets that have an acquisition cost of $5,000 or more
and a life expectancy of more than one year are capitalized.
What should be done with expenditures directly associated with the purchase or erection of a new facility?
They should be capitalized.
Capitalizing expenditures means treating them as long-term investments rather than immediate expenses.
What is the chief determinant for capitalizing expenditures related to a new facility?
Whether the expenditure adds to the real value of company assets and has a useful life of more than one year.
This means that if an expenditure improves the asset’s value and lasts beyond a year, it should be capitalized.
What does the term ‘facility’ encompass?
It applies equally to a building, individual piece of equipment, or software license package.
This broad definition allows for various types of assets to be considered as facilities.
What does the term ‘entire facility’ refer to?
The whole plant.
This term emphasizes the complete operational unit rather than individual components.
What determines if expenditures relate to an existing facility?
The determination largely depends on whether the expenditure:
* Increases productivity or capacity substantially
* Extends the life of the entire facility beyond its original expected life by a major number of years
* Modifies an existing facility for a substantially different use
These criteria help assess the impact of expenditures on existing facilities.
Fill in the blank: An expenditure that increases productivity or capacity substantially is a criterion for determining _______.
[expenditures related to an existing facility]
True or False: Extending the life of a facility beyond its original expected life is a criterion for determining expenditures related to an existing facility.
True
What is one of the criteria for determining if an expenditure modifies an existing facility?
The modification is for a substantially different use
This indicates that the purpose of the facility is significantly changed.
What is considered an expense when work is undertaken?
When the intention is to:
* re-instate physical condition to a specified standard
* prevent further deterioration or failure
* restore correct operation within specified parameters
* replace components at the end of their useful/economic life with modern engineering equivalents
* make temporary repairs for immediate health, safety and security reasons (e.g. after a major failure)
These expenses are typically associated with maintenance and repairs.
What characterizes capital work?
When the intention is to:
* improve the condition of the asset beyond its originally assessed standard of performance or capacity
* increase productivity or capacity substantially
* extend the life of the entire facility beyond its original expected life by a major number of years
* modify an existing facility for a substantially different use
* significantly reduce costs
This work often involves significant investments aimed at enhancing asset value.
Fill in the blank: An expense can be defined as work undertaken with the intention of _______.
[re-instating physical condition to a specified standard]
This reflects maintenance objectives.
