Financial Accounting (Chp. 6)

Front 1

Define depreciation

Back 1

Depreciation is the process of systematically expensing the cost of a long-lived TANGIBLE asset over the periods that benefit from its use.

Front 2

What effect is on the financial statements when purchasing PPE (aka “Property, Plant, and Equipment”)?

Back 2

These assets are shown on the BALANCE SHEET in the last half of the asset section, after current assets.

The use of long-term assets is shown on the INCOME STATEMENT with depreciation, depletion, and amortization expense.

The STATEMENT of CASH FLOWS will indicate any cash expenditures for PPE as cash used for investing activities.

Front 3

What are the 3 methods of allocating the costs of long-term assets?

Back 3

[Straight-line method]: a depreciation method in which the (annual) depreciation expense is THE SAME each period.
* Depreciation base = Cost - salvage value
* Annual depreciation expense =Depreciation base/useful life

[Activity (units of prod.) method]: the method of depreciation in which useful life is expressed in terms of the total units of activity or production expected from the asset, and the asset is written off in proportion to its activity during the accounting period.
* Depreciation base = Cost – salvage value.
* Depreciation rate = depreciation base/estimated number of units.
* Depreciation expense for period = Depreciation rate × number of units during period.

[Double decline method]: an accelerated depreciation method in which depreciation expense is based on the declining book value of the asset.
*Multiply the book value by 2x the straight-line rate (which is 1 over the useful life)

Front 4

Define "useful life"

Back 4

How long the company plans to use the asset (which is measured in years or in units); it is NOT the same as “physical life."

Front 5

Define "book value"

Back 5

This is also called "carrying value." It is COST less (minus) ACCUMULATED DEPRECIATION

Front 6

Define "acquisition/invoice cost"

Back 6

The amount paid for the asset, including all amounts necessary to get the asset up and running.

Front 7

Define "residual/salvage value"

Back 7

the estimated value of the asset at the end of its economically useful life.

Front 8

Define "depreciation base"

Back 8

COST minus SALVAGE VALUE

Front 9

What are the different types of fixed assets (aka long-term operational assets)?

Back 9

*Tangible assets

*Intangible assets

Front 10

What are the names/examples of the different types of fixed assets (aka long-term operational assets)?

Back 10

For Tangible assets:
[Examples]: land (a non-depreciable asset), buildings, machinery, natural resources, equipment, vehicles, furniture, fixtures, leasehold improvements.

For Intangible assets:
[Examples]: copyrights, patents, licenses, trademarks, franchises.

Front 11

What are some examples that represent historical cost of PPE (amounts to capitalize)?

Back 11

>>Land (property) purchase cost
a. Purchase cost of land
b. Real estate commissions
c. Attorney fees
d. Costs of preparing land for use (clearing or draining)
e. Costs of tearing down existing structures

>>Plant purchase cost
a. Purchase of buildings and/or factories
b. Costs to update or remodel facilities
c. Any other costs to make the plant operational

>>Equipment cost (buying the building)
a. Purchase cost
b. Freight-in (shipping costs to have the equipment delivered)
c. Insurance
d. Installation costs
e. Costs of training employees

>>Building construction (constructing the building)
a. Architect or contractor fees
b. Construction fees
c. Costs of renovating.

Front 12

What is the difference between revenue expenditures & capital expenditures?

Back 12

[Revenue expenditures]: Expenditures made to keep an asset in good working order. Remember that it will only benefit the current accounting period in which it is incurred. These amounts appear on an INCOME STATEMENT as EXPENSES.

[Capital expenditures]: Substantial costs spent to improve the quality or extend the life of an asset. These amounts appear on a BALANCE SHEET as ASSETS.

Front 13

Explain the accounting treatment of PPE?

Back 13

Accountants say that PPE is reported at its amortized cost or its depreciated cost.

Front 14

Identify depreciable assets

Back 14

Tangible assets, especially property, plant, and equipment.

Front 15

Which costs are actually “capitalized costs” of an asset (recorded as ASSET aka “capital expenditure”)?

Back 15

Some examples: remodeling & improvement projects

Front 16

Compare the depreciation methods & their effect on the financial statements

Back 16

Read p 272-278 in the book

Front 17

Explain the effect of depreciation expense on the financial statements

Back 17

FINANCIAL STATEMENTS

*Balance Sheet
o Original cost of assets & accumulated depreciation account.

*Income statement
o Depreciation expense & amortization expense for current period.

*Statement of cash flows
o Cash for buying or selling assets.

*Footnotes
o Depreciation method used & useful life of assets reported.

Front 18

Explain ROA

Back 18

It measures how well a company is using its assets to generate revenue, an overall measure of a company’s profitability.

= Net INCOME + interest earned / Average total assets

Front 19

Explain the Asset Turnover Ratio

Back 19

It measures how efficiently a company is using its assets to generate sales.

= Net SALES / Average total assets