Week 8 Key Concepts Flashcards
Interest:
is the payment for the use of money. Interest expense is reported separately in the
income statement.
Simple interest
charges occur when interest earned is withdrawn and only the principal remains
invested.
simple interest: I =PxRxT
Compound interest:
interest is earned on reinvested principal and interest. The accumulated
sum grows rapidly since interest is earned on interest as well as on the principal.
Future Value:
the single amount to which invested principal plus interest grows.
Present value:
a single amount of money at the present time that is the economic equivalent of a
stream of future payments.
Contracts involving delayed payments
are evaluated by finding the present value of the stream
of payments. The present value of a stream of payments is a single amount of money at the
present time that is the economic equivalent of the entire stream.
Compounding period:
The time period for which interest is calculated.
Annuity:
A series of equal cash flows made at the beginning or end of equal periods of time.
Ordinary annuity or annuity in arrears:
is an annuity whose payments occur at the end of
each period. Normally used in this course.
Annuity due or annuity in advance:
is an annuity whose payments occur at the beginning of
each period. Only used in this course when indicated, if nothing said, assume it is ordinary.
Perpetuity:
is an annuity whose payments continue forever is called a perpetuity. Perpetuities
can be either ordinary annuities or annuities due.
eBook End of Appendix B – Activities recommended
Problems 04, 05, 08, 10 and 19
eBook End of Appendix B – Activities recommended
Problems 04, 05, 08, 10 and 19
Capital assets:
They are long-lived assets used by a company to help produce product and otherwise
contribute to the revenue- generating process.
Major classes of capital assets:
Property, Plant and Equipment; Intangibles; long-lived assets held for sale
Basket Purchases:
Several assets are bought together for one price but for accounting records the
acquisition cost of each must be identified. Allocation based on relative sales value method.
Intangible assets:
An asset, other than a financial asset, that lacks physical substance, but contribute
significantly, for a long-time to the revenue generating process.
Goodwill:
the excess of the cost of an acquired enterprise over the net of the amounts assigned to assets
acquired and liabilities assumed. Goodwill as per GAAP is only recognized when it is purchased.
Assets held for sale:
When management commits to a plan to sell a long-lived asset, is actively
marketing it, expects to complete the sale within a year (or longer if certain conditions are met), and sets a reasonable sales price, the long-lived asset is classified as ‘held for sale’.
Betterment:
The costs incurred to enhance service potential is a “betterment” and may be added to the carrying amount. Service potential is enhanced when there is an increase in physical output, associated operating costs are lowered, useful life is extended, quality of output is improved.
Repair & maintenance expenses
The costs to maintain service potential are expensed in the period incurred
Amortization:
rational and systematic allocation of cost less residual over useful life. Also called depreciation for property, plant and equipment and depletion for natural resource properties. Journal entry to record depreciation/amortization/depletion expense:
Dr Depreciation Expense
Cr Accumulated Depreciation
Depreciation methods for PPE assets:
straight-line, units of activity, and declining balance method.
Amortization of intangible assets with definite life:
Similar to straight-line method for PPE assets.
Depletion of natural resources:
Using units of production method
Stub Period Depreciation:
partial month depreciation, important to determine when an asset starts to
depreciate and the accumulated depreciation at the moment of sale. The 15th day of the month is the cutoff
Changing depreciation methods:
Changes in depreciation method are accounted for retroactively with
restatement: depreciation since the assets were acquired is recomputed and the comparative amounts in
financial statements are restated. The effect, and reason for the change, is disclosed in the notes to FS.
Changes in estimates of useful life/residual value:
They are accounted for prospectively, in the current
and future periods.
Impairment of assets:
Impairment is the condition that exists when the carrying amount (cost –
accumulated amortization) of a long-lived asset exceeds its fair value. If an impairment occurs, journal
entry to record it is:
Dr. Impairment Loss and
Cr. Accumulated amortization
eBook End of Chapter 9 – Activities recommended
Problems 03, 06 and 07
Download the audited financial statements of a company from SEDAR or EDGAR, and read the
footnotes that are related to Capital Assets accounts, such as depreciation/amortization methods.
eBook End of Chapter 9 – Activities recommended
Problems 03, 06 and 07
Download the audited financial statements of a company from SEDAR or EDGAR, and read the
footnotes that are related to Capital Assets accounts, such as depreciation/amortization methods.
