chapter 9 concepts Flashcards
Plant assets (property, plant, and equipment; plant and equipment; and fixed assets)
Resources that have physical substance, are used in the operations of the business, and are not intended for sale to customers.
The historical cost principle requires that companies record plant assets at ____
Cost. Cost consists of all expenditures necessary to acquire an asset and make it ready for its intended use.
Revenue expenditures
Expenditures that are immediately charged against revenues as an expense.
Capital expenditures
Expenditures that increase the company’s investment in plant assets.
Cash equivalent price
An amount equal to the fair value of the asset given up or the fair value of the asset received, whichever is more clearly determinable.
The cost of land includes
(1) the cash purchase price, (2) closing costs such as title and attorney’s fees, (3) real estate brokers’ commissions, and (4) accrued property taxes and other liens on the land assumed by the purchaser.
Land improvements
structural additions with limited lives that are made to land, such as driveways, parking lots, fences, landscaping, and underground sprinklers. The cost of land improvements includes all expenditures necessary to make the improvements ready for their intended use.
True or False. inclusion of interest costs in the cost of a constructed building is limited to interest costs incurred during the construction period.
true
Two criteria apply in determining the cost of equipment:
(1) the frequency of the cost—one time or recurring, and (2) the benefit period—the life of the asset or one year.
Ordinary repairs
Expenditures to maintain the operating efficiency and expected productive life of the asset.
Additions and improvements
Costs incurred to increase the operating efficiency, productive capacity, or expected useful life of a plant asset.
lease
a contractual agreement in which the owner of an asset (the lessor) allows another party (the lessee) to use the asset for a period of time at an agreed price.
advantages of leasing an asset versus purchasing it are:
- Reduced risk of obsolescence.
- Little or no down payment.
- Shared tax advantages.
- Assets and liabilities not reported.
Operating lease
A contractual agreement allowing one party (the lessee) to use another party’s asset (the lessor); accounted for like a debt-financed purchase by the lessee.
Capital lease
A contractual agreement allowing one party (the lessee) to use another party’s asset (the lessor); accounted for like a debt-financed purchase by the lessee.
Depreciation
The process of allocating to expense the cost of a plant asset over its useful life in a rational and systematic manner.
True or False depreciation is a cost allocation process, not an asset valuation process
True
Depreciation applies to three classes of plant assets:
land improvements, buildings, and equipment. Land is not a depreciable asset
Obsolescence
the process by which an asset becomes out of date before it physically wears out.
True or False Recognizing depreciation for an asset does not result in the accumulation of cash for replacement of the asset.
True. The balance in Accumulated Depreciation represents the total amount of the asset’s cost that the company has charged to expense to date; it is not a cash fund.
Depreciable cost
The cost of a plant asset less its salvage value.
Straight-line method
A method in which companies expense an equal amount of depreciation for each year of the asset’s useful life.
Straight-line method
A method in which companies expense an equal amount of depreciation for each year of the asset’s useful life.
Depreciation expense formula
cost - salvage value / useful life
Declining-balance method
A depreciation method that applies a constant rate to the declining book value of the asset and produces a decreasing annual depreciation expense over the asset’s useful life.
Accelerated-depreciation method
A depreciation method that produces higher depreciation expense in the early years than the straight-line approach.
double declining balance method
2 x basic depreciation rate x book value. Used with declining balance approach
Units-of-activity method
A depreciation method in which useful life is expressed in terms of the total units of production or use expected from the asset.
When a change in an estimate is required, the company makes the change in _______but not to prior periods.
current and future years
A permanent decline in the fair value of an asset.
Impairment
practice of timing the recognition of gains and losses to achieve certain income results is known as
earnings management.
Intangible assets
Rights, privileges, and competitive advantages that result from the ownership of long-lived assets that do not possess physical substance.
Companies record intangible assets at ____
Cost. Cost is comprised of all expenditures necessary for the company to acquire the right, privilege, or competitive advantage.
Amortization
The process of allocating to expense the cost of an intangible asset.
The cost of intangible assets with ______ lives should not be amortized.
indefinite
Patent
An exclusive right issued by the U.S. Patent Office that enables the recipient to manufacture, sell, or otherwise control an invention for a period of 20 years from the date of the grant.
Research and development costs
Expenditures that may lead to patents, copyrights, new processes, and new products; must be expensed as incurred.
Copyright
An exclusive right granted by the federal government allowing the owner to reproduce and sell an artistic or published work. Copyrights last for the life of the creator plus 70 years.
Trademark (trade name)
A word, phrase, jingle, or symbol that distinguishes or identifies a particular enterprise or product.
Franchise
A contractual arrangement under which the franchisor grants the franchisee the right to sell certain products, to perform specific services, or to use certain trademarks or trade names, usually within a designated geographic area.
Goodwill
The value of all favorable attributes that relate to a company that are not attributable to any other specific asset. Goodwill is not amortized because it is considered to have an indefinite life.
Return on assets
A profitability measure that indicates the amount of net income generated by each dollar of assets;
return on assets = net income / average total assets.
Asset turnover
Indicates how efficiently a company uses its assets to generate sales;
asset turnover = net sales / average total assets.
profit margin
net income / net sales
true or false Unlike other depreciation methods, the declining-balance method ignores salvage value in determining the amount to which the declining-balance rate is applied.
true
