Accounting Chapter 11

Front 1

Long-Term Assets

Back 1

Have a useful life of more than one year, are used in the operation of a business, and are not intended for resale to customers.

Front 2

Tangible Assets

Back 2

Accounted for through depreciation

Front 3

Natural Resources

Back 3

Accounted for through depletion

Front 4

Intangible assets

Back 4

Accounted for through amortization

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Amortization

Back 5

the periodic allocation of the cost of the asset to the periods it benefits.

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Carrying Value

Back 6

The unexpired part of an asset's cost.

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Asset Impairment

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Occurs when the carrying value of a long term asset exceeds its fair value.

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Free Cash Flow

Back 8

The amount of cash that remains after deducting the funds a company must commit to continue operating at its planned level.

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Positive free cash flow

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A company has met all its cash commitments and has cash available to reduce debt or to expand its operations.

Front 10

Negative Free Cash Flow

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A company will have to sell investments, borrow money, or issue stock in the short term to continue at its planned level.

Front 11

Expenditure

Back 11

Refers to a payment or an obligation to make a future payment for an asset, such as a truck, or for a service, such as a repair.

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Capital Expenditure

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An expenditure for the purchase or expansion of a long-term asset. Recorded in asset accounts because they benefit several future accounting periods.

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Revenue Expenditure

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An expenditure made fro the ordinary repairs and maintenance needed to keep a long-term asset in good operating condition. Recorded in expense accounts because their benefits are realized in the current period.

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Additions

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Enlargements to the physical layout of a plant asset. For example, if a new wing is added to a building, the benefits from the expenditure will be received over several years, and the amount paid should be debited to an asset account.

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Betterments

Back 15

Improvements to a plant asset but do not add to the plant's physical layout. Installation of an air conditioning system is an example. Because they provide benefits over a period of years, their costs should be debited to an asset account.

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Extraordinary Repairs

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Repairs that significantly enhance a plant asset's estimated useful life or residual value. For example, a complete overhaul of a building's heating and cooling system may extend the system's useful life by five years. Typically recorded by reducing the Accumulated Depreciation account.

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Leasehold Improvements

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Improvements to leased property that become the property of the lessor at the end of the lease. For example, a tenant's installation of light fixtures, carpets, or walls. Usually classified as tangible assets.

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Cost

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The net purchase price of an asset plus all reasonable and necessary expenditures to get it in place and ready for use.

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Residual Value

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The portion of an asset's acquisition cost that a company expects to recover when it disposes of the asset.

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Depreciable cost

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An asset's cost less its residual value.

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Estimated Useful Life

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The total number of service units expected from a long-term asset.

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Straight-line Method

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A method of computing depreciation, where the asset's depreciable cost is spread evenly over the estimated useful life of the asset. Based on the assumption that depreciation depends only on the passage of time.

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Production Method

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A method of computing depreciation based on the assumption that depreciation is solely the result of use and that the passage of time plays no role in the process.

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Accelerated Method

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Results in relatively large amounts of depreciation in the early years of an asset's life and smaller amounts in later years.

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Declining-Balance Method

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The most common accelerated method of depreciation, computed by applying a fixed rate to the carrying value (the declining balance) of a tangible long-term asset. Although any fixed rate can be used the most common rate is a percentage equal to twice the straight line depreciation percentage.

Front 26

Double-Declining-Balance Method

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When twice the straight-line rate is used

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Group depreciation

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The estimated useful life of an asset is the average length of time assets of the same type are expected to last.

Front 28

Economic Stimulus Act of 2008

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Allows a small company to expense the first $250,000 of equipment expenditures rather than record them as assets and depreciate them over their useful lives.

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Successful Efforts Accounting

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The cost of successful exploration - for example, producing an oil well - is a cost of the resource. Should be recorded as an asset and depleted over the estimated life of the resource. The cost of an unsuccessful exploration - such as the cost of a dry well - is written off immediately as a loss.

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Full Costing Method

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All costs, including the cost of dry wells, are recorded as assets and depleted over the estimated life of the producing resources.

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Definite Useful LIfe

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The useful life is subject to a legal limit or can be reasonably estimated. (Patents, copyrights, and leaseholds)

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Indefinite Useful LIfe

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The useful life of the asset is not limited by legal, regulatory, contractual, competitive, economic or other factors. Trademarks and brands.