Chapter 6

Question 1

What are tangible assets?

Answer 1

Assets with physical substance

Question 2

What are intangible assets?

Answer 2

Assets without physical substance

Question 3

What is capitalization?

Answer 3

recording of the cost/expense on a balance sheet to delay full recognition of the expense

Question 4

What are capital expenditures?

Answer 4

Outlays to acquire PP&E (Property, Plant and Equipment)

Question 5

What are the conditions for expenses to be capitalized as an asset?

Answer 5

1. Future economic benefit likely to flow to entity
2. Cost of asset can be measured reliably

Question 6

Considerations about which costs to capitalize

Answer 6

1. Capitalization costs should be directly linked to future economic benefits
2. Capitalized costs can’t be higher than expected benefits that will be acquired through use of asset

Question 7

what is capitalized interest?

Answer 7

Borrowing costs (interest) should be capitalized as a part of the asset (building, land etc.)

Question 8

What is depreciation?

Answer 8

The long-term systematic allocation to ensure that the long-term asset is evenly expensed over time

Question 9

what is the book value on the balance sheet?

Answer 9

Book value = purchase price - accumulated depreciation

Question 10

What are the required assumptions for depreciaton?

Answer 10

1. Useful life: period in which asset will provide economic benefits and should be no longer than intended use time
2. Redisual value = the expected value at end of useful life.

Question 11

What is the depreciation base and how is it calculated?

Answer 11

Portion of the cost to be depreciated over a certain period

Question 12

What are the different types of depreciation?

Answer 12

1. straight-line method
2. Double-declining-balance method
3. Units-of-production method

Question 13

What is straight-line depreciation?

Answer 13

Depreciation is spread evenly over useful life

(Purchase price - salvage value)/useful life

Question 14

How do you calculate the double-declining-balance depreciation?

Answer 14

(net book value/useful life)*2

More in early years and less in later years

Question 15

What is the unit-of-production method

Answer 15

Depreciation expense based on use. Common with natural resources. The useful life is counted as number of units.
PP&E = acquisition costs + costs to make it ready.

Question 16

How is the depletion reate per unit calculated?

Answer 16

(acquisition cost-residual value)/estimated quantity of resource available

Question 17

How is the cost of resources reported on the balance sheet?

Answer 17

1. While natural resources are still in ground–> fixed assets on BS
2. While it has been extracted –> Inventory on BS
3. Once it is sold –> COGS on IS

Question 18

How are gains and losses on fixed assets calculated?

Answer 18

proceeds from sale - book value of sold asset

Question 19

What is an impairment test?

Answer 19

A comparison of net book value and the recoverable amount.

Question 20

When are assets subjected to impairment tests?

Answer 20

1. Decline in market value
2. Adverse change in tech/economy or regulations
3. Asset is obsolete

Question 21

What is the recoverable amount?

Answer 21

Recoverable amount is the higher of Asset fair value and Value in present use (present value of future cash flows)

Question 22

What are write-downs?

Answer 22

If impairment tests rule an asset to be worth less than book value, the difference is written-off.

Question 23

What does the PPE turnover calculate?

Answer 23

It measures the effectiveness of the use of physical productive assets

Question 23

What are the challenges of asset write-downs?

Answer 23

1. Insufficient write-downs
2. Aggresive write-downs

Question 24

How is the PPE turnover calculated?

Answer 24

sales revenue / average net PP&E

Question 25

How do you calculate Percent depreciated?

Answer 25

Accumulated depreciation / cost of depreciable assets

Question 26

What does Percent depreciated show?

Answer 26

It measures the age of long-term assets. A high ratio means there will be a lot of replacement costs in the coming years.

Question 27

What types of PP&E do not depreciate?

Answer 27

Land and construction in progress

Question 28

When are intangible assets identifiable?

Answer 28

Intangible assets are identifiable when they can be seperated from the entity or if they come forth out of legal/contractual rights

Question 29

What are the common issues in reporting intangible assets?

Answer 29

1. Which costs are capitalized and how are they transferred to the income statement 2. Future benefits of intangibles are hard to quantify 3. Useful life is impossible to confidently estimate Purchased intangibles usually capitalized, internally created not.

Question 30

Are R&D costs capitalized or expensed?

Answer 30

1. Research costs are directly expensed 2. Development costs are capitalized once product reaches technical and commercial feasibility, unless they can't be seperated Multi-use equipment and facilities are capitalized

Question 31

What is included in R&D costs?

Answer 31

Types of R&D costs: personnel benefits, specific facilities, materials and supplies

Question 32

What are patents?

Answer 32

Patents are exclusive rights for production and use of technology.

Question 33

How are patents reported?

Answer 33

1. Purchased patents are reported at fair value 2. Internally created patents only capitalize legal, registration and development costs

Question 34

What is copyright?

Answer 34

exclusive right for an artist's life +50-70 years for his creation.

Question 35

How is acquired copyright reported?

Answer 35

The acquisition cost is capitalized and amortized over economic life

Question 36

What is a trademark and how is it reported?

Answer 36

Registered name/brand etc. associated with product. Cost of developed trademarks are expensed when they are incurred.

Question 37

What are franchise rights and how are they reported?

Answer 37

Gives company permission to operate a particular business in a location for as set period of time Capitalized as intangible asset on balance sheet and amortized over useful life.

Question 38

How should intangibles with definite life be reported?

Answer 38

amortised over expected useful life of asset

Question 39

How should intangibles with indefinite life be reported?

Answer 39

not be expensed until useful life can be reasonably estimated

Question 40

What is goodwill?

Answer 40

Difference between the purchase price paid and the fair value of IDENTIFIABLE net assets (assets - liabilities assumed)

Question 41

What does the impairment test of goodwill entail?

Answer 41

1. Goodwill allocated to each Cash-generating unit that is expected to benefit from the acquisition. 2. Carrying amount of the CGU > recoverable amount --> impairment

Question 42

What is a cash-generating unit?

Answer 42

small groups of assets creating mostly independent cash flows. Example: One store in retail chain

Question 43

When is Net Realisable Value lower than cost?

Answer 43

1. Cost increase 2. Fall in selling price 3. Loss leader strategy 4. Production/purchasing error 5. obsolescense of product

Question 44

What are the three types of obsolescence?

Answer 44

1. Functional: alternative product does job better 2. Economic: no more demand anymore 3. Physcical deterioration

Question 45

What are asset retirement obligations?

Answer 45

1. Obligation to clean up at end of life 2. Component of cost of asset 3. Capitalized as expected costs at beginning 4. Opposite entry = provision

Question 46

What are the categories of intangible assets?

Answer 46

1. Marketing-related 2. Customer-based 3. Technology=based 4. Artistic-based 5. Contract-based

Question 47

What are the recognition criteria for capitalizing intangible assets?

Answer 47

1. Company must have control over assets 2. It should be identifiable 3. Probable future economic benefits 4. reliable mesurement If it fulfills this: capitalize, otherwise don't If it is acquired through an acquisition--> capitalize.

Question 48

Q

Answer 48

W