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115 Cards in this Set

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  • Back
Depreciation Expense
Amortization Expense
Loss on Impairment

are found on what Finan doc?
Income Statement
Asset depreciation (indirect method)
Cash paid (received) to purchase (from sale of) long-term assets
Cash paid to acquire another company

Are found on what Financial doc?
Statement of cash flows
Long-term Assets
Property, Plant, & Equipment
Accumulated Depreciation
Intangible Assets

are found on what financial doc?
Balance sheet
What exhibits these traits:
not held for resale to customers
are used by a business to generate revenues
Long Term operating assets
Property, plant, and equipment
Intangible assets
Name some examples of PPE
Tangible, long-lived assets
Acquired for use in business operations
Name three characteristics of Intangible Assets
Long-lived assets
Used to facilitate the operation of a business

Do not have physical substance
What are the Long term Asset stages?
Evaluate / Acquire / Estimate&Recognize / Monitor / Dispose
What process is this?The process of evaluating a long-term project that may include purchasing property, plant, and equipment
Capital Budgeting
Common capital budgeting models:
Payback period
Accounting rate of return
Net present value
Define Payback Period
The time it takes for a company to recover its original investment in cash

PP = Initial Invest / Annual Cashflow
How do you find Rate of Return?
Annual Accting income / Initial Investment
Define the cost of PP&E
includes any costs necessary to bring the asset to the condition and location for its intended use
How do you account for Subsequent expenditures after a PPE purchase?
Normal repairs and maintenance are expensed in the current period
Expenditures which extend the useful life or increase the productive capacity are capitalized
Asset book value is increased
Annual depreciation is revised
Defin a Lease
A lease is a contract whereby
one party (lessee)
is granted the right to use property
owned by another party (lessor)
for a specified period of time for a specified cost
What are the differences between an operating lease and a capital lease?
Operating lease - equivalent to a rental
Lease payments charged to expense
Capital lease – equivalent to a purchase
The asset acquired is recorded in property, plant and equipment
The leased asset is depreciated over the lease period
A lease liability is shown in the liability section of the balance sheet
What is this?
The acquisition price of the asset is equal to fair market value of noncash consideration plus any cash given
Acquisition by Exchange
How do you record an acquisition through donation?
The asset is recorded at its fair market value at time it is received

Debit Land / Credit Gain - donated asset
How do you record an acquisition with a basket purchase?
Fixed assets purchased for a lump sum need to be recorded separately
The total purchase price must be allocated among individual assets received in proportion to their appraised values
How do you recorn an acquistion of an entire company?
All acquired assets are recorded on the books of the acquiring company at their fair values as of the acquisition date
The excess of the purchase price over the fair value of the identifiable assets represents goodwill
How do you record an acquisition through self construction?
Self-constructed assets are recorded at cost, including all expenditures necessary to build the asset and make it ready for its intended use
Costs include:
Materials and labor used directly in construction
A reasonable share of general overhead
If interest is included it is called capitalized interest
Interest should be included equal to the amount that could have been saved if the money used on the construction had instead been used to repay loans
Define the characteristics of an intangible asset
Generate revenues
Grant a right to use of a product, process, name, image, customer list, or business practice
Uncertainty about future benefits greater than that of tangible assets
Specifically identifiable
Except goodwill
Define a Patent
An exclusive right to use, manufacture, process, or sell a product granted by the U.S. Patent Office. Patents have a legal life of 17 years, but their economic life may be shorter
Define a Copywright
The exclusive right of the creator or heirs to reproduce and/or sell an artistic or published work. Granted by the U.S. government for a period of 50 years after the death of the creator. Amortized over the shorter of its economic life or legal life.
Define a tradename
A symbol or name that allows the holder to use it to identify or name a specific product or service. A legal registration system allows for an indefinite number of 20-year renewals
What is this? An exclusive right to use a formula, design, technique, or territory.
Define Goodwill
The ability of a company to earn above-normal income. Recorded goodwill is the excess amount paid to acquire a company, over and above the fair market value of the company’s identifiable assets.
A business combination occurs when one company buys all of the assets of the do you account for the combination?
The combination is accounted for using the purchase method (as if one company is buying the other)
Describe the Purchase Method
The identifiable assets and liabilities are recorded at their fair values
The excess of the purchase price over the fair value of the identifiable net assets is recorded as goodwill
Goodwill represents the company’s reputation, superior business practices, and market position
Goodwill is only recorded when it is purchased
Is this depreciation?

The systematic allocation of an asset’s cost to the periods of benefit
Is this Depreciation?Accumulation of a cash fund for asset replacement
A determination of an asset’s current value
Name two factors that cause depreciation
Causes of depreciation:
Physical deterioration
Due to use, passage of time, and exposure to the elements
Outdated, outmoded, or inadequate
What is this?
An estimate of the asset’s worth at the time of its disposal
Residual value (salvage value)
What is this?
The original cost minus the residual value Estimated useful life

A measure of the service potential in terms of years or units produced
Depreciable Cost
What are the three depreciation methods?
Allocates an equal amount of asset cost per year

Allocates cost based on the productive output of the asset

Declining balance
An accelerated method which allocates more cost to depreciation in the early years than the later years
What depreciation method is this:
An equal amount of depreciation expense is allocated to each period
Straight-line method
What depreciation method is this?
Annual depreciation is determined by applying a fixed percentage to the remaining book value at the beginning of each year
Declining balance

1/life x rate = percentage rate
The straight line method is appropriate for what type of assets?
assets whose benefits diminish on a fairly uniform basis

Most companies use the straight-line method due to its simplicity
The double-declining-balance method is appropriate for what type of assets?
assets that give up a greater portion of their benefits in the early years
What is this called?

Property is depreciated for half the taxable year in which it is placed in service, regardless of when use actually begins
The Half Year Convention
What happens to salvage value for tax purposes
it's ignored
Is Depreciation a source of cash?
Depreciation is not a source of cash; it is a noncash expense

Depreciation indirectly affects cash flow
depreciation reduces taxable income
results in lower income taxes being paid
If later events require a change in economic life and residual value, what happens?
A change in estimate is not an error correction
A change in estimate is reflected by spreading the remaining depreciable cost over the remaining useful life of the asset
With finite life intangible assets, name 3 characteristics
Amortize over the economic useful life or legal life, whichever is shorter
Not to exceed 40 years
Direct subtraction from the asset account
What is this called?Occurs when an event happens after the purchase of an asset that reduces its value
Recognized in the financial statements as a reduction in the value of the asset on the balance sheet and a loss on the income statement
Impairment of an asset value
What do you call the difference between the book value of the asset and the fair value
When are gains in PPE recognized?
Gains are recognized in income only when assets are sold
When you compare US and International accounting standards, what is one of the key differences in accounting for PPE?
Conservatism controls the US and gains are only recognized at sale. The IAS allows upward revaluation.
Name 3 ways to dispose of long-term assets
retirement, sale, or trade-in of operating assets
What method of disposal is this?
Occurs when an operating asset is removed from service and is disposed of without the company receiving any proceeds
An difference between the cost and balance in the accumulated depreciation account results in a loss on this activity
Where are Gains/Losses reported on the Income Statement?
In the "other" category
What ratio is used to evaluate the appropriateness of the level of a company’s PP&E?
FAT - Fixed Asset Turnover = Sales / Average PPE

Can be interpreted as the number of dollars in sales generated by each dollar of fixed assets
Chapter 12 review slide - over
Long-term assets provide the infrastructure for production and distribution
Capital budgeting models include the payback period, accounting rate of return, and net present value analysis
Patents, franchises, licenses, and goodwill are intangible assets.
Straight-line and declining balance are common depreciation methods
Recognizing impairment for PPE is a two-step process
Gain (loss) on asset disposal occurs if proceeds received are greater (less) than the asset’s book value at date of sale
What are the steps in the life cycle of a security issue?
Determine / purchase / classify / earn / monitor / sell
Name the 5 reasons that companies invest in other companies
Safety cushion
Cyclical cash needs
A return on investment

Safety cushion
Investments are sometimes made to give a company a ready source of funds as a margin of safety

Cyclical cash needs
Some companies have a seasonal business cycle requiring large amounts of cash for inventory buildup followed by increased sales and cash collections

A return on investment
Companies invest simply to earn a rate of return

Companies can invest to
Ensure a supply of raw materials
Influence a board of directors
Diversify their product offerings

An investment resulting in over 50% ownership of a company’s shares of stock produces a controlling interest
The investing company can control the other company’s operating, investing, and financing decisions
What involves a promise of interest payments and repayment of the principal amount of the debt?
Debt Securities - Debt security investors have priority over equity investors in terms of interest payments and principal in the event of a corporate liquidation
What represents an actual ownership interest in a corporation
Equity Securities Equity investors have the right to vote in corporate matters such as election of directors
Equity investors may receive a rate of return from dividends and appreciation of stock price
What are those debt and equity securities purchased with the intent to take advantage of short-term price changes
Trading Securities
What are those debt and equity securities purchased for safety, to hold temporarily excess cash, or to earn a normal long-run return
Available-for-sale securities
What are are debt securities purchased with the intent of holding the securities until they mature
Held to Maturity Securities
What are equity securities purchased in order to exercise ownership influence (at least 20% of the shares) over another company
Equity method securities
At what price are investment securities recorded?
Cost includes
The market price
Any additional expenditures required in making the purchase
E.g., stockbroker’s fee
Where are Realized gains and losses from the sale of securities are included?
Income Statement
A gain or loss is realized when it is confirmed and verified through the actual sale of the security
Where are Changes in the market value (unrealized gains and losses) are recognized?
income statement

The market value is reported on the balance sheet as an asset
How are available for sale securities recorded on the balance sheet?
The market value is reported on the balance sheet as an asset
The accumulated unrealized gain/loss is treated as a stockholders’ equity adjustment
How do you compute the overall rate of return?
Portfolio return / portfolio beginning balance
How are unrealized gain/losses measured?
Measured from beginning of year to end of year
Asset adjusted to end-of-year market value
Gain (Loss) reported
Trading portfolio: on income statement
Available-for-Sale portfolio: on Balance Sheet (Equity Section) in Accumulated Other Comprehensive Income
How are realized gains/losses measured?
Measured as the difference between historical cost and the sale proceeds
Gain (Loss) reported
Trading portfolio: on income statement
Available-for-Sale portfolio: on income statement
What type of Securites have these traits:
Debt securities
Intent to hold until maturity date
Cash inflows
While owned, interest
At maturity date, maturity value
Reported at amortized cost
Unrealized gains and losses are not measured or recognized
Held to Maturity Securities
If the purchase price of a bond is LESS than the face value, what is it?
Discount, because the market's interest rate is HIGHER than the bond's
If the purchase price of a bond is Equal to the face, what is it?
If the purchase price of a bond is GREATER than the face value, what is it?
What is the equity method when discussion securities?
The equity method is used when an investor company has significant influence over an investee company
Significant influence is presumed if a company owns between 20% and 50% of the company
Describe the accounting for equity method securities
The investment asset is originally recorded at its acquisition cost
Account for activity using the accrual method:
Record revenue as earned, not paid
Accrual method prevents manipulation of income by investor entity.
How does the investor account for the investee's reported net income?
Reported as revenue and increases the carrying value of the Investment account on the balance sheet

Cash dividends received are recorded as an increase to Cash and a decrease to the Investment account (return of investment)
What needs to be done with the books when an investor owns a controlling interest (over 50% ownership of the voting stock of the investee)
The investor/parent is able to determine both the financial and operating policies of investee/subsidiary
Consolidated financial statements are required
What do you call the interest of other shareholders for subsidiaries that are not 100% owned by the parent
Minority Interest
Ch 13 summary
Companies make investments in securities for a variety of reasons
Equity investments are classified as trading, available-for-sale, or equity-method; debt security investments are classified as trading, available-for-sale, or held-to-maturity
Trading and available-for-sale securities are carried at market value; held-to-maturity bond investments are carried at amortized cost; equity-method investments are carried at adjusted-cost
Consolidated financial statements are prepared if the parent owns more than 50% of a subsidiary; minority interest reports the equity of other investors in subsidiaries that are not wholly-owned
What is a liability?
Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.
There are two types of liabilities, what are they?
Monetary liabilities are obligations payable in a fixed sum of money
Examples: accounts payable, accruals

Nonmonetary liabilities are obligations to provide fixed amounts of goods and services
Example: revenues received in advance of providing a service
There are two types of liabilities, what are they?
Current liabilities are obligations expected to be satisfied within one year of the balance sheet date
Examples: accounts payable, accrued liabilities, current maturity of mortgage

Long-term liabilities are obligations expected to be satisfied after one year from the balance sheet date
Examples: bonds payable, remainder of mortgage
What is the Current ratio?
Measures the ability to repay debt in the short run

Current ratio = current assets / current liabilities
What current ratio is considered indicative of liquidity concerns? Historically and now?
Historically, less than 2:1 indicative of liquidity concerns
Now, due to advances in technology, frequently less than 1:1
When are contingent liabilities recognized?/
Contingent liabilities are recognized if
Probable and
Can be reasonably estimated
Current liabilities are shown at face value, how are long-term liabilities shown?
Present day value. (what it would cost to completely pay off the obligation today
There are 5 common types of short term operating liabilities, what are they?
Accts Payable, Accrued liabilities, short term debt, promissary notes (commercial paper), line of credit
What do you call A loan backed by an asset whose title is pledged to the lender
Mortgage A mortgage is payable in equal installments (an annuity)
Each payment is comprised of interest and principal
Interest is charged on the declining principal balance
What do you call a loan backed by certain assets as collateral?
secured loan
What is a written agreement between a borrower and a lender in which the borrower agrees to
Bond - Repay a stated sum on a future date
Make periodic interest payments at specified dates
After issuance, bonds may be publicly traded on a bond exchange
There are four names for the denomination of a bond - what are they?
The denomination is also called the
Face value
Maturity value
Par value
What do you call the date on which a bond matures?
Maturity Date
What are two other names for the bond's stated interest rates
Face Rate or Coupon rate

Is specified on the bond at issuance
Is set as close as possible to the market rate
established by the money market
depends on the prevailing interest rates and perceived risk of the company
Remains constant over the life of the bond
Is applied to the face of the bond to calculate interest payments to bondholders

Most bonds pay interest semiannually
Stated interest rate is always an annual amount
What type of bonds don't pay interest periodically?
zero coupon bonds -

Are issued at a deep discount
The discount represents interest to be earned over the life of the bond
Are a popular form of issue with governmental units
What type of bonds have all principle due on a single date?
Term Bonds
What type of bonds have bonds payable at specific intervals
serial bonds
Also called debentures, these are issued without any security to back them
Unsecured Bonds
Also called mortgage bonds, these are secured by the borrower’s collateral or specified assets
Secured Bonds
What type of bonds may at some future, specified date be exchanged for, or converted into, the company’s common stock
Convertible Bonds
What types of bonds allow the borrower, or issuer, to call or redeem the bonds prior to their maturity
Callable Bonds
What are the 4 factors that influence bond prices?
Stated interest rates, Prevailing market rates, length of time to maturity, perceived risk of investment
How are Bonds recorded and recognized in the financial statements?
at the present value of future cash flows
Interest annuity (face × stated rate × time)
Maturity value
Depending on the relationship between the stated interest rate and the yield rate, how are bonds valued?
par value
par value minus a discount
par value plus a premium
When bonds are repaid at maturity, Bonds Payable is decreased and Cash is decreased
Cash -10000 bond pay -100000
What is collection of cash and short-term securities that is set aside for repayment of the principal of the bonds
A bond sinking fund is an asset reported in the investment section of the balance sheet
What occurs when a firm’s long-term debt is retired before maturity
Early extinguishment of debt.
A gain or loss occurs when there is a difference between the reacquisition price and the carrying value of the debt
The gain or loss is reported as a component of income from continuing operations on the income statement
What are the economic advantages of leasing for the LESEE
No (or low) down payment
Avoid risks associated with ownership
Technological obsolescence
Physical deterioration
Changing economic conditions
What are the economic advantages for the lessor
Increased sales
Ongoing business relationship with the lessee
Residual value retained
What type of lease is accounted for as if the lease agreement transfers ownership of the asset to the lessee
The lease is equivalent to a financed purchase
An asset and liability must be recorded on lessee’s books
Capital Lease
What type of lease is accounted for as rental agreements, with no transfer of effective ownership associated with the lease
Lease payments are recorded as rent expense by the lessee and rent revenue to the lessor
Operating Lease
If any one of the following criteria are met, then the lease is classified as a capital lease
The lease transfers ownership of the property to the lessee by the end of the lease term
The lease contains a bargain purchase option
The lease term is equal to 75% or more of the estimated economic life of the leased property
The present value of the minimum lease payments equals or exceeds 90% of the fair market value of the property
What do you call Obligations of a company that are not disclosed on the financial statements
Off-balance sheet financing
Three common types of off-balance sheet financing are
Operating leases
Unconsolidated subsidiaries
Joint ventures
What is a subsidiary that is accounted for using the equity method
Unconsolidated subsidiary Companies that purchase less than 50% of an investee do not have to prepare consolidated financial statements
The investee’s debt is kept off the balance sheet
What occurs occur when companies join forces to share the costs, risks, and benefits associated with specifically defined projects
Joint Venture A joint venture is carefully structured to ensure that the liabilities of the venture are not disclosed in the balance sheets of the companies
They are often just a special type of unconsolidated subsidiary
What do you call Using debt to finance asset purchases
What is debt ratio equation?
debt ratio = total liabilities / total assets
Rule of thumb: Most large U.S. companies borrow about half the funds they use to purchase assets
What is the debt to Equity ratio?
DEQ = total liabilities / total equity
ch 14 summary
Liabilities are existing obligations for future economic sacrifice
Accounts payable and other short-term operating accruals are generally non-interest-bearing
Long-term liabilities are reported at the present value of future cash flows
Bonds are issued to borrow funds from multiple sources. Bonds can be issued at par, at a discount, or at a premium.
Leases are either rental in nature (operating) or in essence, purchases (capital). Four specific criteria exist for capital leases
Off-balance-sheet financing arises with operating leases, unconsolidated subsidiaries, and joint ventures
Debt-related financial ratios indicate the degree of leverage and the extent of a company to make period interest payments.