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Financial Acc Systems 1 > Ch 11 > Flashcards

Ch 11 Flashcards

0
Q

Depletion

A

Describes reduction in cost of natural resources over
Period of time

(timber, gravel, oil, coal)

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1
Q

Depreciation, is the accounting process of…

A

allocating cost of tangible assets to expense in systematic manner to periods expected to benefit from use of asset

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2
Q

Amortization

A

Expiration of intangible assets

such as patents and copyrights

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3
Q

3 basic questions used in the depreciation process?

A

1 what Depreciable base is used for the asset?

2 what’s the asset’s useful life?

3 what method of cost appointment is best for this asset?

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4
Q

Salvage value

A

Estimated amount company will receive when it sells

Asset or removes it from service

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5
Q

Depreciation base

A

Total amount of depreciation that has occurred over asset’s useful life

Ex. Asset that cost $10,000 with a salvage value of $1,000
Has a depreciation base of $9,000

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6
Q

2 reasons companies retire assets?

A

1 physical factors (such as casualty or expiration of
Physical life)

2 economic factors (obsolescence)

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7
Q

3 economic or functional factors that cause retirement of asset?

A

1 inadequacy

2 supersession

3 obsolescence

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8
Q

Economic/fct. Factor: inadequacy?

A

Asset ceases to be useful to company because demands

Have changed

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9
Q

Economic/fct. Factor: supersession

A

Replacement of one asset with another more efficient

And economical asset

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10
Q

Economic/fct. Factor: obsolescence

A

Different situations not involving inadequacy or

Supersession

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11
Q

Activity method of depreciation AKA variable charge, units of production approach

A

Assumes depreciation is function of use of productivity,

Not passage of time

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12
Q

Depreciation: Activity Method equation

A

Depreciation charge =

((cost - salvage value) x (hours this yr.))/total estimated hours

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13
Q

Depreciation: straight line method

A

Considers depreciation as function of time

Not a function of usage

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14
Q

Depreciation: straight line method equation

A

Depreciation charge = (cost - salvage value)/estimated service life

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15
Q

The expense recognition principle does not justify a constant charge to income. If the benefits from the asset decline as the asset ages, then a…

A

Decreasing charge to income better matches cost

To benefits

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16
Q

Decreasing-charge methods AKA Accelerated depreciation methods

A

Provide for high depreciation cost in earlier years

And lower charges in later periods

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17
Q

Sum of years digits method depreciation?

A

Results in a decreasing depreciation charge based on

Decreasing fraction of Depreciable cost

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18
Q

Depreciable cost

A

Original cost - salvage value

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19
Q

Declining balance method depreciation

A

Utilizes depreciation rate (expressed as percentage)
That is sum multiple of straight line method

Does not deduct salvage value in computing
Depreciation base

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20
Q

Double declining balance method

A

Depreciates assets at twice (200%) the straight line rate

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21
Q

Companies often switch from the declining balance

method to the straight line method to ensure that they…

A

Depreciate asset only to its salvage value

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22
Q

Special depreciation method: group method

A

Used when assets are similar in nature and have

Similar useful lives

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23
Q

Special depreciation method: composite method

A

Used when assets are dissimilar and have different

Lives

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24
Q

Composite depreciation rate equation?

A

Composite depreciation rate =

Depreciation per year/ total cost of assets

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25
Q

Composite life

A

Length of time it takes to depreciate assets on

composite basis

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26
Q

Companies are free to develop their own special or tailor-made depreciation methods. GAAP requires only that the method result in the…

A

Allocation of asset’s cost over asset’s life in

Systematic and rational manner

27
Q

Hybrid depreciation method used in steel industry:

Product Variable Method

A

Combination straight line/activity approach

28
Q

Half year convention

A

Charge one half year’s depreciation both in year of

Acquisition and in year of disposal

29
Q

How should companies compute depreciation for partial periods unless otherwise stipulated?

A

Compute depreciation on basis of nearest full month

30
Q

Does depreciation provide for the replacement of assets?

What generates for replacement of assets specifically?

A

Depreciation in no way provides funds for replacement of
assets

The funds for replacement of assets come from revenues
Generated from use of asset

31
Q

How should companies handle revisions of depreciation rates?

A

Report change of rate of depreciation in current and
prospective reports

Divided remaining book value - salvage value by
remaining estimated life

32
Q

Lower of cost or market for inventories does not apply to…

A

Property, plant and equipment

33
Q

Under GAAP, companies don’t report fair value of

Long lived assets because a…

A

Does not plan to sell such assets

34
Q

If assumption of being able to recover the cost of an investment is not valid, then the company should…

A

Report reduction in value

35
Q

Impairments

A

Write offs of long lived assets

36
Q

Recoverability test

A

Used to determine whether impairment has occurred

37
Q

Recoverability test estimates the future net cash flows expected from the…

A

Use of that asset and it’s eventual disposition

38
Q

If the sum of net cash flows is less than carrying amount of asset then… Greater than…

A

Asset is impaired (less)

Asset not impaired

39
Q

IFRS Fair value test, difference btw GAAP recoverability test

A

Used to measure impairment loss, more strict than GAAP

Doesn’t include first stage of recoverability test comparing
Undiscounted cash flows to carrying amount

40
Q

Impairment loss

A

Amount by which carrying amount of asset exceeds its

Fair value

41
Q

If no active market exists for an asset, to measure fair value…

A

The present value of expected future net cash flows

Used to calculate fair value

42
Q

Impairment write-ups IFRS VS. GAAP?

A

IFRS permits write ups for subsequent recoveries of
Impairment up to original amount

GAAP prohibits write ups, except for assets to be
Disposed of

43
Q

Assets held for disposal should be reported at…

A

Lower of cost or net realizable value

44
Q

An asset held for disposal in future periods can be written up or down as long as…

A

Carrying value after write up never exceeds carrying

Amount of asset before impairment

45
Q

How should companies report losses or gains for assets held for future disposal?

A

Part of income from operations

46
Q

Natural resources AKA wasting assets

A

Petroleum, minerals and timber

47
Q

2 main features of natural resources?

A

1 complete removal (consumption) of asset

2 replacement of asset only by an act of nature

48
Q

Depletion

A

Process of allocating cost of natural resources

49
Q

Four factors involved in computation of depletion base?

A

1 acquisition cost of deposit
2 exploration cost
3 development costs
4 restoration costs

50
Q

Acquisition cost

A

Price company pays to obtain property right to

Search and find undiscovered natural resources

51
Q

Exploration costs

A

Costs needed to find resource

52
Q

2 types of development costs

A

Tangible equipment costs

Intangible development costs

53
Q

Tangible equipment costs

A

Include all transportation and heavy equipment needed
To extract resource and get it ready for market

Normally not included in depletion base

54
Q

Intangible development costs

A

Drilling costs, tunnels, shafts and wells needed for
Production of natural resource

Considered part of depletion base

55
Q

Restoration costs

A

Costs of restoring land after extraction of natural resource

Costs part of depletion base

56
Q

How do companies usually compute cost of depletion

A

Using the units of production method (an activity approach)

57
Q

Computation of depletion rate equation?

A

Depletion cost per unit =

(total cost - salvage value)/total estimated units available

58
Q

Liquidating dividends

A

Dividends greater than amount of accumulated

Net income

59
Q

Full cost concept

A

Cost of drilling a dry hole is cost needed to find

commercially profitable wells

60
Q

Successful efforts concept

A

Capitalize costs only of successful projects

61
Q

Reserve recognition accounting (RRA)

A

As soon as company discovers oil, it reports value
On balance sheet and income statement

No longer used after 1981

62
Q

IFRS and GAAP permit oil exploration companies today to use either…

A

Full cost or successful efforts approaches

63
Q

Companies should disclose the following info for property, plant and equipment, 4 things?

A

1 depreciation expense for period
2 balances of major classes of Depreciable assets
By nature and function
3 acc. Depr.
4 general description of depreciation method used

64
Q

Asset turnover, what does it measure? Equation?

A

How efficiently company uses assets to generate sales

Asset turnover = net sales/avg. total assets

65
Q

Profit margin on sales, what does it measure?, equation?

A

Measure for analyzing the use property, plant
and equipment for profitability

Profit margin on sales = net income/net sales

66
Q

Return on assets (ROA), what does it measure? 2 equations?

A

Measures profitability

Return on assets = profit margin on sales x asset turnover

Return on assets = net income/avg. total assets

Financial Acc Systems 1 (22 decks)

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