Session 8 Flashcards
What are ‘Tangible’ assets?
Physical substance
Assets = subject to depreciation
Natural resource assets = subject to depletion
Land (not depreciated, b/c does not wear out or become obsolete)
What are intangible assets?
No physical substance (SUBJECT TO AMORTIZATION)
Definite life:
Patents
Copyrights
Franchises
vs.
Indefinite life:
Trademarks
Goodwill
Bitcoin/NFTs
What is the process for asset-related expenditures that reap benefit of more than one year? One year or less?
*** Asset-related expenditures that will benefit more than one year are capitalized
Expense deferred, and current income is higher
*** Expenditures that provide benefit lasting one year or less are expensed in current year (aka Revenue expenditures)
Expense recognized immediately, and current income is lower
What is Acquisition Cost?
All necessary expenditures made in acquiring and preparing an asset for use should be recorded as cost of asset (Purchase price + expenditures)
Sales taxes
Legal fees
Transportation/installation costs
*** Financing/interest charges are NOT capitalized and cash discounts are deducted from the invoice price
What are the different methods of recognizing Depreciation?
***Straight-line depreciation: spreads the depreciation value evenly over the useful life of an asset
→ Depreciation Exp = (Acquisition Cost - Residual Value) / Years of Useful Life
vs.
***Accelerated depreciation: matches higher depreciation expense with higher revenues in the early years of an asset’s useful life when the asset is more efficient
→ may want to ‘take the hit’ earlier in the asset’s life for strategic reasons
vs.
***Double-Declining-Balance Depreciation:
Annual Depreciation Expense = Beginning Net Book Value * (2 / Useful life)
→ Ignores residual value
→ Stops depreciating when the book value reaches the residual value
Which of the 3 methods of recognizing depreciation recognizes more depreciation cost?
NONE! :) All recognize the same amount — it’s the TIMING of this recognition that varies
What is Goodwill?
Intangible value associated with company above and beyond fair value of identifiable assets and liabilities
Only recorded when company is acquired
No goodwill associated with internally generated values
Assessed annually for “impairment”
What does Asset Impairment entail? When is it done?
when companies REDUCE the value of an asset to the lower fair market value, (see LCM above) recognizing this as an expense/loss
Non-cash loss/expense
Happens due to:
Damage
Lack of demand from customers, etc.
Required across all asset classes (PP&E, Intangibles, Inventory)
What are Current (Short-term) Liabilities?
Liabilities a company expects to settle within one year of the balance sheet date
What are Long-term Liabilities?
Liabilities a company expects to settle beyond one year
What happens to Net Income when companies estimate Current/Short-term Liabilities?
Net Income is reduced in the SAME PERIOD as the related revenues are recognized – resulting in either a loss or a gain
Examples:
Estimated returns
Estimated uncollectible accounts/bad debt
Estimated future warranties
What are Contingent Liabilities?
Potential liabilities created as result of past event – they are dependent on uncertain future events
Examples:
Lawsuits
Product Warranties
What is Working Capital?
Working Capital =
Current Assets - Current Liabilities
I.e., Pretty much assets/cash that can be liquidated immediately
What is the Depreciation Equation?
Depreciation Expense = (Cost of Asset - Residual Value) / Useful Life
