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Flashcards in Ch 11 Deck (67):
0

Depreciation, is the accounting process of...

allocating cost of tangible assets to expense in systematic manner to periods expected to benefit from use of asset

1

Depletion

Describes reduction in cost of natural resources over
Period of time

(timber, gravel, oil, coal)

2

Amortization

Expiration of intangible assets
such as patents and copyrights

3

3 basic questions used in the depreciation process?

1 what Depreciable base is used for the asset?

2 what's the asset's useful life?

3 what method of cost appointment is best for this asset?

4

Salvage value

Estimated amount company will receive when it sells
Asset or removes it from service

5

Depreciation base

Total amount of depreciation that has occurred over asset's useful life

Ex. Asset that cost $10,000 with a salvage value of $1,000
Has a depreciation base of $9,000

6

2 reasons companies retire assets?

1 physical factors (such as casualty or expiration of
Physical life)

2 economic factors (obsolescence)

7

3 economic or functional factors that cause retirement of asset?

1 inadequacy

2 supersession

3 obsolescence

8

Economic/fct. Factor: inadequacy?

Asset ceases to be useful to company because demands
Have changed

9

Economic/fct. Factor: supersession

Replacement of one asset with another more efficient
And economical asset

10

Economic/fct. Factor: obsolescence

Different situations not involving inadequacy or
Supersession

11

Activity method of depreciation AKA variable charge, units of production approach

Assumes depreciation is function of use of productivity,

Not passage of time

12

Depreciation: Activity Method equation

Depreciation charge =
((cost - salvage value) x (hours this yr.))/total estimated hours

13

Depreciation: straight line method

Considers depreciation as function of time

Not a function of usage

14

Depreciation: straight line method equation

Depreciation charge = (cost - salvage value)/estimated service life

15

The expense recognition principle does not justify a constant charge to income. If the benefits from the asset decline as the asset ages, then a...

Decreasing charge to income better matches cost
To benefits

16

Decreasing-charge methods AKA Accelerated depreciation methods

Provide for high depreciation cost in earlier years
And lower charges in later periods

17

Sum of years digits method depreciation?

Results in a decreasing depreciation charge based on
Decreasing fraction of Depreciable cost

18

Depreciable cost

Original cost - salvage value

19

Declining balance method depreciation

Utilizes depreciation rate (expressed as percentage)
That is sum multiple of straight line method

Does not deduct salvage value in computing
Depreciation base

20

Double declining balance method

Depreciates assets at twice (200%) the straight line rate

21

Companies often switch from the declining balance
method to the straight line method to ensure that they...

Depreciate asset only to its salvage value

22

Special depreciation method: group method

Used when assets are similar in nature and have
Similar useful lives

23

Special depreciation method: composite method

Used when assets are dissimilar and have different
Lives

24

Composite depreciation rate equation?

Composite depreciation rate =
Depreciation per year/ total cost of assets

25

Composite life

Length of time it takes to depreciate assets on
composite basis

26

Companies are free to develop their own special or tailor-made depreciation methods. GAAP requires only that the method result in the...

Allocation of asset's cost over asset's life in
Systematic and rational manner

27

Hybrid depreciation method used in steel industry:
Product Variable Method

Combination straight line/activity approach

28

Half year convention

Charge one half year's depreciation both in year of
Acquisition and in year of disposal

29

How should companies compute depreciation for partial periods unless otherwise stipulated?

Compute depreciation on basis of nearest full month

30

Does depreciation provide for the replacement of assets?
What generates for replacement of assets specifically?

Depreciation in no way provides funds for replacement of
assets

The funds for replacement of assets come from revenues
Generated from use of asset

31

How should companies handle revisions of depreciation rates?

Report change of rate of depreciation in current and
prospective reports

Divided remaining book value - salvage value by
remaining estimated life

32

Lower of cost or market for inventories does not apply to...

Property, plant and equipment

33

Under GAAP, companies don't report fair value of
Long lived assets because a...

Does not plan to sell such assets

34

If assumption of being able to recover the cost of an investment is not valid, then the company should...

Report reduction in value

35

Impairments

Write offs of long lived assets

36

Recoverability test

Used to determine whether impairment has occurred

37

Recoverability test estimates the future net cash flows expected from the...

Use of that asset and it's eventual disposition

38

If the sum of net cash flows is less than carrying amount of asset then... Greater than...

Asset is impaired (less)

Asset not impaired

39

IFRS Fair value test, difference btw GAAP recoverability test

Used to measure impairment loss, more strict than GAAP

Doesn't include first stage of recoverability test comparing
Undiscounted cash flows to carrying amount

40

Impairment loss

Amount by which carrying amount of asset exceeds its
Fair value

41

If no active market exists for an asset, to measure fair value...

The present value of expected future net cash flows
Used to calculate fair value

42

Impairment write-ups IFRS VS. GAAP?

IFRS permits write ups for subsequent recoveries of
Impairment up to original amount

GAAP prohibits write ups, except for assets to be
Disposed of

43

Assets held for disposal should be reported at...

Lower of cost or net realizable value

44

An asset held for disposal in future periods can be written up or down as long as...

Carrying value after write up never exceeds carrying
Amount of asset before impairment

45

How should companies report losses or gains for assets held for future disposal?

Part of income from operations

46

Natural resources AKA wasting assets

Petroleum, minerals and timber

47

2 main features of natural resources?

1 complete removal (consumption) of asset

2 replacement of asset only by an act of nature

48

Depletion

Process of allocating cost of natural resources

49

Four factors involved in computation of depletion base?

1 acquisition cost of deposit
2 exploration cost
3 development costs
4 restoration costs

50

Acquisition cost

Price company pays to obtain property right to
Search and find undiscovered natural resources

51

Exploration costs

Costs needed to find resource

52

2 types of development costs

Tangible equipment costs

Intangible development costs

53

Tangible equipment costs

Include all transportation and heavy equipment needed
To extract resource and get it ready for market

Normally not included in depletion base

54

Intangible development costs

Drilling costs, tunnels, shafts and wells needed for
Production of natural resource

Considered part of depletion base

55

Restoration costs

Costs of restoring land after extraction of natural resource

Costs part of depletion base

56

How do companies usually compute cost of depletion

Using the units of production method (an activity approach)

57

Computation of depletion rate equation?

Depletion cost per unit =
(total cost - salvage value)/total estimated units available

58

Liquidating dividends

Dividends greater than amount of accumulated
Net income

59

Full cost concept

Cost of drilling a dry hole is cost needed to find
commercially profitable wells

60

Successful efforts concept

Capitalize costs only of successful projects

61

Reserve recognition accounting (RRA)

As soon as company discovers oil, it reports value
On balance sheet and income statement

No longer used after 1981

62

IFRS and GAAP permit oil exploration companies today to use either...

Full cost or successful efforts approaches

63

Companies should disclose the following info for property, plant and equipment, 4 things?

1 depreciation expense for period
2 balances of major classes of Depreciable assets
By nature and function
3 acc. Depr.
4 general description of depreciation method used

64

Asset turnover, what does it measure? Equation?

How efficiently company uses assets to generate sales

Asset turnover = net sales/avg. total assets

65

Profit margin on sales, what does it measure?, equation?

Measure for analyzing the use property, plant
and equipment for profitability

Profit margin on sales = net income/net sales

66

Return on assets (ROA), what does it measure? 2 equations?

Measures profitability

Return on assets = profit margin on sales x asset turnover

Return on assets = net income/avg. total assets