Long-term operating assets

Question 1

Assets must possess the following characteristics

Answer 1

It must be owned by the company and expected to provide future benefits

Question 2

Considerations for capitalizing costs

Answer 2

1) The cost should be directly linked to the future benefits 2) The costs capitalized should be no greater than the expected future benefit Ex: If you record a $200 asset then you should derive at least $200 in value from the asset.

Question 3

Capitalized interest.

Answer 3

Interest capitalized as part of the asset’s cost.

Question 4

Should you capitalize maintenance costs?

Answer 4

No

Question 5

Should you capitalize improvements?

Answer 5

Yes. Improvement enhance the usefulness of the asset or extends the asset’s useful life.

Question 6

Depreciation

Answer 6

The systematic allocation of assigning the value of an asset’s cost to each period benefited

Question 7

Is depreciation a measure of the fair value of an asset?

Answer 7

No

Question 8

Impairment

Answer 8

If the fair value of PPE decreases permanently then companies must recognize losses on those assets.

Question 9

Impairment costs are frequently reported as

Answer 9

restructuring costs

Question 10

Issues with write-downs

Answer 10

Insufficient write-down - the impairment is larger than was the company reports Aggressive write-down - the impairment is larger than what was actually reported

Question 11

PPE Turnover

Answer 11

Revenue / Average PPE, net

Question 12

Percent depreciated

Answer 12

Accum dep / cost of depreciable assets

Question 13

Types of intangibles

Answer 13

Separately transferrable or not separately transferable

Question 14

Separately transferrable assets

Answer 14

Type 1: Assets that are a product of contractual or other legal rights (e.g. patents, trademarks, copyrights) Type 2: Benefits that are not contractually or legally defined but can be sold (e.g. customer lists, formulas, processes, databases)

Question 15

Do you capitalize R&D?

Answer 15

No, you expense it because R&D success is uncertain

Question 16

What costs can you capitalize for a patent?

Answer 16

If you purchase the patent you can capitalize the purchase amount. If you develop the patent internally you can only patent the legal costs and registration fees.

Question 17

What can you capitalize for trademarks or copyrights?

Answer 17

Only the purchase price if you acquire them. You can’t capitalize your internal costs.

Question 18

What can you capitalize for franchise rights?

Answer 18

The purchase price

Question 19

What must you determine when you acquire or capitalize an intangible?

Answer 19

If the asset has a definite life.

Question 20

Impairment

Answer 20

An intangible asset is impaired if the book value of the asset exceeds its fair value and the write-down is equal to the difference between the book value and fair value.

Question 21

Goodwill

Answer 21

The excess of the purchase price paid for a company over the fair value of its identifiable net assets acquired in the purchase. Goodwill is considered to have an indefinite life.

Question 22

How does the acquisition of patents and trademarks from a 3rd party impact the statement of cash flows?

Answer 22

It’s represented as an investing activity

Question 23

How does the cost of generating patents and trademarks from internally get represented on the SOCF?

Answer 23

Operating activities

Question 24

What costs are capitalized for self-constructed assets?

Answer 24

All costs during construction including the interest cost of financing the construction

Question 25

When is an asset impaired?

Answer 25

When the expected benefits (undiscounted cash flows) derived from the asset fall below its book value