Lecture 6 - PPE and Intangibles (Chapter 7) Flashcards
PPE and intangibles, estimated residual value, depreciation methods, "asset turnover ratio"
True or false: both PPE and intangibles are short-term/current assets.
False (they’re both long-term/non-current assets)
What are intangible assets?
“Intangible assets are non-physical assets that provide long-term value for a company.” (ChatGPT)
Provide examples of intangibles.
Legal rights, goodwill (the value of a company’s reputation), patents, trademarks, slogans.
Where is PPE reported?
On the balance sheet.
How do you calculate a company’s PPE?
PPE = Cost - Accumulated depreciation
What’s necessary to know in order to allocate depreciation for a PPE asset?
Cost, estimated useful life, and estimated residual value.
What does “estimated residual value” mean?
It’s the amount of money that a company expects it will receive for an asset that’s at the end of its useful life.
How do you calculate an asset’s depreciable amount?
Depreciable amount = Cost - Estimated residual value
Account for the “straight-line” depreciation method.
An equal amount of depreciation is recognized each year.
How do you calculate depreciation using the “straight-line” method?
Straight-line depreciation per year = (Cost - Estimated residual value) / Useful life (years)
Account for the “units of production” depreciation method.
A fixed amount of depreciation is assigned to each unit of output that the asset produces.
How do you calculate depreciation using the “units of production” method?
Units of production per unit of output = (Cost - Estimated residual value) / Useful life (units of production)
Account for the “double declining balance” depreciation method.
Computes annual depreciation by multiplying an asset’s net value with a constant percentage.
How do you calculate depreciation using the “double declining balance” method?
Annual double declining balance depreciation rate = (1 / Useful life (years)) * 2
What effect does depreciation have on both assets and equity?
It decreases them.
When is an asset impaired?
When its carrying amount is higher than its recoverable amount.
What does “asset turnover ratio” refer to?
It refers to the number of sales a company can generate from its assets.
How do you calculate a company’s asset turnover ratio?
Asset turnover ratio = Net sales / Average assets
What does “return on assets” refer to?
It refers to how much profit a company can generate from its assets.
How do you calculate a company’s return on its assets?
Return on assets = Net profit / Average assets
How do you calculate depreciation expenses?
Depreciation expenses = Depreciation per unit * Number of units produced
