Depreciation Flashcards
the decrease in the value of
physical property with passage of time
Depreciation
in commercial sense, is the present worth of all future amounts that are to be received through ownership of a particular property
Value
the amount which a willing buyer will pay to a willing seller for the property where each has equal advantage and is under no compulsion to buy or sell
Market Value of a property
what the property is worth to the owner as an operating unit.
Utility or Use Value of a property
the value which is usually determined by a disinterested third party in order to established a price that is fair to both the seller and the buyer.
Fair Value
the original or historical cost of a property less the accumulated depreciation.
Book Value or Depreciated Book Value
the price that can be obtained from the sale of property as second hand. This implies that the property is still usable.
Salvage or Resale or Second Hand Value
the amount that a property
can be sold off as junk.
Scrap or Junk Value
the length of time for which the property is capable of performing the function for which it was designed or manufactured
Physical Life of a property
the length of time during which
the property maybe operated at a profit.
Economic Life
includes original purchase price plus delivery cost, installation cost and corresponding fees and taxes.
First Cost of equipment
the difference between the first cost and salvage value or scrap value of a property.
Depreciation Cost
assumes that value of property is
proportional to its age.
Straight Line Method
concept is similar to annuity where equal amount of payment (or fund) is set aside so that its accumulated total will be equal to replacing the property once its useful life has been used up.
Sinking Fund Formula
asset decreases in value faster in early period than the latter portion of its economic life. Annual depreciation is assumed fixed percentage of the book value at the beginning of a year. This method is not applicable if salvage value of a property is zero. Also known as Constant Percentage Method or Matheson formula.
Declining Balance Method
very similar to Declining Balance Method except that the rate of depreciation k is replaced by 2/L.
Double Declining Balance Method
the value of a property decreases at a descending rate.
Sum-of-the-Years-Digits (SYD) Method
is a measure of the effectiveness of an investment of capital. Is computed and compared with the minimum attractive rate of return. Often this min. attractive rate of return is equal to the prevailing bank interest.
it is assumed that there is a single investment life and that the revenue and cost data are the same for each year.
Rate of Return (ROR) Method
In this method, minimum required profit on the invested capital is included as a cost. If the difference in revenue and disbursement is not less than zero, proposed investment is justified or viable.
Annual Worth Method
If the present worth of the net cash flow is equal to or greater than zero, project is economically justified.
PW of Net Cash Flow = PW of Revenue/Income – PW of Costs/Expenses
Present Worth Method
If the future worth of the net cash flow is equal to or greater than zero, project is economically justified.
Future Worth Method
commonly defined as the length of time required to recover the first cost of investment at zero interest rate.
Net Annual Cashflow = Annual Income – Annual Cost
If payback period is less than the useful life of the project, then it is justifiable.
Payback or Payout Period Method
the value of the variable for which the costs for the alternatives will be equal.
the quantity of production at which the income is equal to the total cost.
Break even point
costs which remain constant, whether or not a given change in operations or policy is adopted; costs that are independent of
the plant output
Fixed Costs
costs which vary with output or change in the activity of an enterprise; costs that are dependent on plant output.
Variable Costs
