Chapter 11 Flashcards
PPE definition:
Assets used in the production of goods and services that a firm sells in order to generate operating income and cash flow
Capitalization definition:
The process of recording an expenditure as an asset
3 PPE Categories:
Land
Land Improvements
Machinery and Equipment
Does Land depreciate?
No
Avoidable Interest definition:
The interest the firm could have avoided if it had not borrowed funds to construct the plant asset
3 types of assets that qualify for interest capitalization:
- Assets constructed or otherwise produced for the firms own use
- Assets constructed by others for the firms use when deposits and progress payments have been made
- Assets intended for sale or lease that they construct or otherwise produce as discrete projects
Weighted Average Accumulated Expenditures (WAAE) definition:
The construction expenditures weighted by the portion of the year that the expenditure is outstanding until the project is complete, or the end of the year if the project is not complete
Depreciation definition:
the systematic and rational allocation of the cost of a long term plant asset to expense over the assets expected useful life
3 methods of Depreciation:
- Straight Line
- Units of Production
- Double Declining Balance
Straight Line definition:
Applies a constant rate of depreciation against a constant depreciable cost
Units of Production definition:
Derives a rate of depreciation per unit produced and applies that rate against the actual number of units produced each period.
Double Declining Balance definition:
Applies a constant rate of depreciation against a declining net book value
Half Year Convention definition:
Firm records half a year of depreciation at the year of purchase and at the final year of use (Used when exact date of acquisition unknown)
Intangible Assets definition:
Assets without physical substance that have economic value because of the contractual or legal right they bestow on the holder.
Finite Life Intangible Assets definition:
Intangible assets that can be individually identified and have limited useful lives
