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Accounting > Chapter 6 > Flashcards

Chapter 6 Flashcards

1
Q

What are tangible assets?

A

Assets with physical substance

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2
Q

What are intangible assets?

A

Assets without physical substance

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3
Q

What is capitalization?

A

recording of the cost/expense on a balance sheet to delay full recognition of the expense

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4
Q

What are capital expenditures?

A

Outlays to acquire PP&E (Property, Plant and Equipment)

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5
Q

What are the conditions for expenses to be capitalized as an asset?

A
  1. Future economic benefit likely to flow to entity
  2. Cost of asset can be measured reliably
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6
Q

Considerations about which costs to capitalize

A
  1. Capitalization costs should be directly linked to future economic benefits
  2. Capitalized costs can’t be higher than expected benefits that will be acquired through use of asset
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7
Q

what is capitalized interest?

A

Borrowing costs (interest) should be capitalized as a part of the asset (building, land etc.)

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8
Q

What is depreciation?

A

The long-term systematic allocation to ensure that the long-term asset is evenly expensed over time

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9
Q

what is the book value on the balance sheet?

A

Book value = purchase price - accumulated depreciation

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10
Q

What are the required assumptions for depreciaton?

A
  1. Useful life: period in which asset will provide economic benefits and should be no longer than intended use time
  2. Redisual value = the expected value at end of useful life.
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11
Q

What is the depreciation base and how is it calculated?

A

Portion of the cost to be depreciated over a certain period

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12
Q

What are the different types of depreciation?

A
  1. straight-line method
  2. Double-declining-balance method
  3. Units-of-production method
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13
Q

What is straight-line depreciation?

A

Depreciation is spread evenly over useful life

(Purchase price - salvage value)/useful life

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14
Q

How do you calculate the double-declining-balance depreciation?

A

(net book value/useful life)*2

More in early years and less in later years

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15
Q

What is the unit-of-production method

A

Depreciation expense based on use. Common with natural resources. The useful life is counted as number of units.
PP&E = acquisition costs + costs to make it ready.

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16
Q

How is the depletion reate per unit calculated?

A

(acquisition cost-residual value)/estimated quantity of resource available

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17
Q

How is the cost of resources reported on the balance sheet?

A
  1. While natural resources are still in ground–> fixed assets on BS
  2. While it has been extracted –> Inventory on BS
  3. Once it is sold –> COGS on IS
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18
Q

How are gains and losses on fixed assets calculated?

A

proceeds from sale - book value of sold asset

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19
Q

What is an impairment test?

A

A comparison of net book value and the recoverable amount.

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20
Q

When are assets subjected to impairment tests?

A
  1. Decline in market value
  2. Adverse change in tech/economy or regulations
  3. Asset is obsolete
21
Q

What is the recoverable amount?

A

Recoverable amount is the higher of Asset fair value and Value in present use (present value of future cash flows)

22
Q

What are write-downs?

A

If impairment tests rule an asset to be worth less than book value, the difference is written-off.

23
Q

What does the PPE turnover calculate?

A

It measures the effectiveness of the use of physical productive assets

23
Q

What are the challenges of asset write-downs?

A
  1. Insufficient write-downs
  2. Aggresive write-downs
24
Q

How is the PPE turnover calculated?

A

sales revenue / average net PP&E

25
Q

How do you calculate Percent depreciated?

A

Accumulated depreciation / cost of depreciable assets

26
Q

What does Percent depreciated show?

A

It measures the age of long-term assets. A high ratio means there will be a lot of replacement costs in the coming years.

27
Q

What types of PP&E do not depreciate?

A

Land and construction in progress

28
Q

When are intangible assets identifiable?

A

Intangible assets are identifiable when they can be seperated from the entity or if they come forth out of legal/contractual rights

29
Q

What are the common issues in reporting intangible assets?

A
  1. Which costs are capitalized and how are they transferred to the income statement
  2. Future benefits of intangibles are hard to quantify
  3. Useful life is impossible to confidently estimate

Purchased intangibles usually capitalized, internally created not.

30
Q

Are R&D costs capitalized or expensed?

A
  1. Research costs are directly expensed
  2. Development costs are capitalized once product reaches technical and commercial feasibility, unless they can’t be seperated

Multi-use equipment and facilities are capitalized

31
Q

What is included in R&D costs?

A

Types of R&D costs: personnel benefits, specific facilities, materials and supplies

32
Q

What are patents?

A

Patents are exclusive rights for production and use of technology.

33
Q

How are patents reported?

A
  1. Purchased patents are reported at fair value
  2. Internally created patents only capitalize legal, registration and development costs
34
Q

What is copyright?

A

exclusive right for an artist’s life +50-70 years for his creation.

35
Q

How is acquired copyright reported?

A

The acquisition cost is capitalized and amortized over economic life

36
Q

What is a trademark and how is it reported?

A

Registered name/brand etc. associated with product.

Cost of developed trademarks are expensed when they are incurred.

37
Q

What are franchise rights and how are they reported?

A

Gives company permission to operate a particular business in a location for as set period of time

Capitalized as intangible asset on balance sheet and amortized over useful life.

38
Q

How should intangibles with definite life be reported?

A

amortised over expected useful life of asset

39
Q

How should intangibles with indefinite life be reported?

A

not be expensed until useful life can be reasonably estimated

40
Q

What is goodwill?

A

Difference between the purchase price paid and the fair value of IDENTIFIABLE net assets (assets - liabilities assumed)

41
Q

What does the impairment test of goodwill entail?

A
  1. Goodwill allocated to each Cash-generating unit that is expected to benefit from the acquisition.
  2. Carrying amount of the CGU > recoverable amount –> impairment
42
Q

What is a cash-generating unit?

A

small groups of assets creating mostly independent cash flows.

Example: One store in retail chain

43
Q

When is Net Realisable Value lower than cost?

A
  1. Cost increase
  2. Fall in selling price
  3. Loss leader strategy
  4. Production/purchasing error
  5. obsolescense of product
44
Q

What are the three types of obsolescence?

A
  1. Functional: alternative product does job better
  2. Economic: no more demand anymore
  3. Physcical deterioration
45
Q

What are asset retirement obligations?

A
  1. Obligation to clean up at end of life
  2. Component of cost of asset
  3. Capitalized as expected costs at beginning
  4. Opposite entry = provision
46
Q

What are the categories of intangible assets?

A
  1. Marketing-related
  2. Customer-based
  3. Technology=based
  4. Artistic-based
  5. Contract-based
47
Q

What are the recognition criteria for capitalizing intangible assets?

A
  1. Company must have control over assets
  2. It should be identifiable
  3. Probable future economic benefits
  4. reliable mesurement
    If it fulfills this: capitalize, otherwise don’t

If it is acquired through an acquisition–> capitalize.

48
Q

Q

A

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Accounting (6 decks)

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