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Flashcards in Chapter 9 Powerpoint Deck (48):
1

Purchase of long lived assets

Recognized as capital expenditures - on balance sheet as asset

recognize when ownership passes to the buyer

Purchased for use in the business to generate future cash flows

2

Recognize periodic deprectiation expense during____________________________

periods in which assets are used to generate revenue

3

_______________ is used to measure long-lived assets at net book value

Accmulated depreciation

4

Two types of costs incurred during the useful life of a plant asset:

1. Ordinary repairs that maintain the operating efficiency and expected productive life of a plant asset

- expensed as incurred

2. Additions and improvements that increase the operating efficiency, productive capacity, or useful life of a plant asset

*both accounted for as capital expenditures

5

U.S GAAP requires companies to record plant assets at _______________

cost

*cost consists of all expenditures necessary to acquire an asset and make it ready for its intended use

**Consistent with the concept of conservatism

6

No ______________ is allowed in the future

upward revaluation

7

If a capitalized expenditure is listed as a revenue expenditure

income will be understated

8

Factors used in computing depreciation

Cost

Useful life

Salvage value

9

Depreciable cost = 

Cost - Salvage Value

10

Straight line method example

Cost - Salvage Value = Depreciable Cost

Depreciable Cost / Useful Life = Depreciation expense

13,000 - 1,000 = 12,000

12,000 / 5 = 2400

11

Journal entry for depreciation expense

Depreciation expense XXX

                   Accmulated depreciation XXX

12

Declining - Balance

Accelerated method

Decreasing annual depreciation expense over the asset's useful life

Double declining-balance rate is double the straight-line rate

Rate applied to book value

13

Units-of-Activity

Companies estimate total units of activity to calculate depreciation cost per unit

Expense varies based on units of activity

Depreciable cost is cost less salvage value

14

Units-of-Activity formula

Depreciable Cost / Total Units of Activity = Depreciation cost per unit

Depreciation Cost per unit / Units of Activity during the year = depreciation expense

15

Why is each method of depreciation acceptable?

Because each recognizes the decline in service potential of the asset in a rational and systematic manner

16

Changes in estimates related to factors used in computing depreciation ________________________________

impact current and future periods, but not prior periods

*change in salvage value, change in estimated useful life

17

If the proceeds exceed the book value, the company recognizes a _______________

gain on disposal

18

If the proceeds are less than the book value, the company recognizes a ________________

loss on disposal

19

Gains and Losses on Disposal are reported ___________________________

seperately from Revenue and Expense in the income statement

20

3 types of disposals of plant assets

Retirement

Sale

Exchange

21

Journal entry for eliminating asset

Accmulated Depreciation X

Loss* (if applicalbe) Y- X

                                       Plant Asset Y

                                   Gain* (If applicable) X - Y

22

Impairment

A permanent decline in the market value of an asset below its book value may result in a large difference between book value and fair value

- example of accounting conservatism

Implication of write-downs in lower depreciation expense in future years - "Big Bath"

23

If an asset is impaired, a company must _________________________________ 

write-down the asset to its fair value in the year the decline in value occurs

24

Recognizing intangible assets

Recognized on balance sheet but because they have economic substance

25

Asset

"Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events"

26

Copyrights and Patents

Recognized when granted

Legal fees to successfully defend them are also capitalized

27

Research and Development Costs (R&D)

Expensed as incurred due to the uncertainties in identifying the extent and timing of future benefits of these expenditures

28

Goodwill

ONLY recognized in an exchange transaction that involves the purchase of an entire business due to measurement difficulties

29

Intangible Assets - Measurement

Initial Costs: The initial cost of acquiring an intangible is recognized as an asset on the balance sheet

Costs to Defend: The costs incurred to successfully defend a patent or copyright are capitalized to the respective intangible asset and amortized over the remaining useful life

30

Initial Costs

The initial cost of acquiring an intangible is recognized as an asset on the balance sheet

31

Costs to Defend

The costs incurred to successfully defend a patent or copyright are capitalized to the respective intangible asset and amortized over the remaining useful life

32

Goodwill

Measured as the excess of purchase price over the fair value of net assets acquired in a business acquisition

33

Goodwill impairment

The amount recorded as Goodwil must be written down if a company determines the value of goodwill has permanently declined

34

Intangibles with limited lives are amortized over their ________________

usefull lives (shorter of legal life or useful life)

35

Intangible assets have either a _____________ or an ______________

limited life; indefinite life

36

Patents legal life

20 years

37

Copyrights legal life

Life of creator plus 20 years

38

Intangible assets with indefinite lives are ___________

not amortized

ex. trademarks/tradenames, goodwill)

39

Franchises and liscences can have either___________

a limited life or an indefinite life

40

Amortization is recorded directly to________________________

intangile assets accounts; no contra asset account is used

41

Research and Development Costs

U.S. GAAP requires all R&D costs to be expensed as incurred

IFRS allows capitalization of some "development" costs but require expensing of "research" costs

 

42

Lease

Contractual agreement in which the owner of an asset (lessor) allows another party (lessee) to use the asset for a period of time at an agreed price

43

Advantages of leasing:

1. Reduced risk of obsolescence

2. Little or no down payment

3. Shared tax advantages

4. Assets and liabilities are not reported for an operating lease (recorded as rental)

Capital lease: lessees show both the asset and the liability on the balance sheet

44

Recognizing long- lived assets on balance sheet impacts

Profitability analysis - ROA and Assets Turnover Ratio

Solvency Analysis (leases) - debt to total assets ratio

45

Return on Assets (ROA)

Net Income / Average Total Assets

46

Asset Turnover Ratio = 

Net Sales / Average Total Assets

47

Debt to total assets ratio = 

Total liabilities / Total Assets

48