Chapter 8: Inventories and cost of goods sold Flashcards
What are several examples of operating assets? Why are operating assets essential to a company’s long-term future?
Operating assets include property, plant, and equipment, and intangibles. Examples of assets considered operating assets are buildings, equipment, land, land improvements, patents, copyrights, and goodwill. Operating assets are important to the long-term future of the company because they are the assets used to produce a product or service sold to customers.
What is the meaning of the term acquisition cost of operating assets? Give some examples of costs that should be included in the acquisition cost.
The acquisition cost of an operating asset includes all the costs normally necessary to acquire the asset and prepare it for its intended use. Acquisition costs include the purchase price, freight costs, installation costs, taxes paid at the time of purchase, and repairs made to prepare the asset for use.
When assets are purchased as a group, how should the acquisition cost of the individual assets be determined?
The acquisition cost of assets purchased as a group should be determined by allocating the purchase price on the basis of the proportion of the fair market value to the total fair market value.
Under what circumstances should interest be capitalized as part of the cost of an asset?
If a company constructs an asset over a period of time and borrows money to finance the construction, the interest incurred during the construction period is not treated as interest expense. Instead, the interest must be included as part of the acquisition cost of the asset.
What factors should influence the choice of depreciation method? Must a company choose just one method of depreciation for all assets?
A company should use a depreciation method that allocates the original cost of the asset to the periods benefited and that allows the company to accurately match the expense to the revenue generated by the asset. However, the company is not required to use the same method for all depreciable assets
Why do many companies use one method to calculate depreciation for the income statement developed for stockholders and another method for income tax purposes?
The purpose in recording depreciation for financial reporting purposes is to allocate the original cost of the asset to the periods benefited in a manner that matches the decline in usefulness of the asset. The purpose in recording depreciation for tax purposes is to minimize the amount of income tax that must be paid.
What should a company do if it finds that the original estimate of the life of an asset or the residual value of the asset must be changed?
The remaining depreciable amount should be recorded over the remaining life of the asset, using the revised estimate or estimates of residual value and asset life.
How is the gain or loss on the sale of an operating asset calculated? Where would the Gain on Sale of Asset account appear on the financial statements?
The gain or loss should be calculated as the difference between the selling price and the book value of the asset as of the date of sale. The account Gain on Sale of Asset or Loss on Sale of Asset should appear on the income statement in the Other Income/Expense category.
Define the term goodwill. Give an example of a transaction that would result in the recording of goodwill on the balance sheet.
Goodwill represents the difference between the acquisition price paid to acquire a business and the total of the fair market values of the identifiable net assets acquired. Goodwill can be recorded as an asset only when one company acquires another.
Give several examples of intangible assets. In what balance sheet category should intangible assets appear?
Patents, copyrights, trademarks, and goodwill are examples of intangible assets. Some companies have a separate category on the balance sheet titled Intangibles for such assets. Other companies include intangibles in a category titled Long-Term Assets or in the Other Assets category of the balance sheet.
When an intangible asset is amortized, should the asset’s amortization occur over its legal life or its useful life? Give an example in which the legal life exceeds the useful life.
Amortization should occur over the shorter of the legal life or useful life. For example, a patent has a legal life of 20 years. But if the invention under patent will be useful over only ten years, then the patent should be amortized over the shorter ten-year period.
Suppose that an intangible asset is being amortized over a ten-year time period but a competitor has just introduced a new product that will have a serious negative impact on the asset’s value. Should the company continue to amortize the intangible asset over the ten-year life?
If an intangible becomes worthless, the asset should be written off as an expense in the period when the decline in value occurs. If the intangible continues to have value but will provide benefit over a period shorter than was originally estimated, the event should be treated as a change in estimate.
