Chapter 9 Accounting

Planet Assets (pg.406)

A firm's long-lived property, plant, and equipment; also called fixed assets. Ex.LandBuildingsEquipementFurniture and Fixtures

(Good Will) and Intangible Assets (pg.406)

Refer to the those economic resources that benefit a company's operations but which lack the physical substance that characterizes plant assets.Ex.CopyrightsTrademarksFranchisesPatents

Historical Cost (pg.407)

Long-lived assets are initially recorded on the balance sheet at their acquisition cost. This measure is also called the asset's historical cost because it represents the amount expended when the asset was originally acquired. -In general, the acquisition cost of a long-lived asset equals the cash and/ or cash equivalent given up to acquire the asset and to prepare it for its intended use.

Land Improvements (pg.409)

Improvements with limited useful lives made to land sites, such as paved parking lots and driveways.-Expenditures for these assets are charged to a separate Land Improvement account on the balance sheet and depreciated over the estimated useful ice of the improvements.

Leasehold Improvements (pg.409)

Expenditures made by a lessee to alter or improve leased property. -The cost of the leasehold improvements is capitalized to the Leasehold Improvements account on the balance sheet and is depreciated over the life of the lease or the life of the improvements, whichever is shorter.

Depreciation (pg.410)

The process of allocating the cost of buildings, equipment, and vehicles to expense over the time periods benefiting from their use.-An expense of generating the revenues recognized during the periods that the asset was in use.

Useful Life (pg.410)

The period of time that an asset is used by a business, running from the date of acquisition to the date of disposal (or removal from services).

Salvage Value (pg.410)

The expected net recovery when a plant asset is sold or removed from service; also called residual value.

Depreciation Accounting (pg.410)

Is simply an attempt to allocate, in a systematic and rational manner, the difference between an asset's acquisition cost and its estimated salvage value over the estimated useful life of the asset.-Depreciation is a systematic allocation for matching expenses to revenue recognition.-Depreciation is not intended to align the book value of an asset to its market value.-Consequently, depreciation accounting techniques are just convenient expedients for estimating asset utilization and should not be considered precise. Although imprecise, depreciation estimates facilitate a better assessment of a business's net income than would result from expecting the asset at either its date of acquisition or its date of disposal.

Straight- Line Method (pg.411)Table on (page 412)

A depreciation method that allocates equal amounts of depreciation expense to each period of an asset's expected useful life. -Under the straight-line method, an equal amount of depreciation expense is allocated to each period of an asset's useful life.Annual Depreciation= (Acquisition cost-Salavage Value)-------------------------------------------------------------Estimated Useful Life (in months or years)

Declining- Balance Method (pg.413)Table in (page 413)

An accelerated depreciation method that allocates depreciation expense to each year by applying a constant depreciation percentage to the declining book value of a long-lived asset.-The declining- balance method is considered to be an "accelerated" method because the constant depreciation percentage it uses is a multiple of the straight-line depreciation rate ( the straight-line depreciation rate= 100 percent/ expected useful life in years).Annual Depreciation=(Book Value at Beginning of Year) x (Double-Declinging Balance Rate)

Accelerated depreciation Method (pg.413)

A depreciation method in which the amounts of depreciation expense taken in the early years of an asset's life are greater then the amounts expensed in late years.

Double-Declining Balance Depreciation (pg.413)

Uses a depreciation rate that is twice the straight-line rate.

150 Percent- Declining Balance Depreciation (pg.413)

Uses a depreciation rate that is one and one-half times the straight-line rate.

Units-of-Production Method (pg.414)Table on (page 414)

A depreciation method that allocates depreciation expense to each operating period in proportion to the amount of the asset's total expected productive capacity used each period.Depreciation per Unit= (Acquisition Cost - Salvage Value)-----------------------------------------------------Total Estimated Units of Production Annual Depreciation=(Depreciation per Unit) x (Units of Production for the Period)-There is no general pattern for the annual depreciation expense under this method. The annual depreciation for the units-of-production method depends on the yearly productive activity of an asset, and this activity will vary from asset to asset.

Impairment Loss (pg.416)Table on (page 417)

A loss recognized on an impaired asset equal to the difference between its book value and its current fair value.-If the value of a plant asset suddenly falls so severely that its future cash flows are estimated to be less than its current book value, the asset is deemed to be impaired and an impairment loss is then recorded.

Modified Accelerated Cost Recovery System (MACRS) (pg.417-418)

A system of accelerated depreciation for U.S. income tax purposes; it prescribes depreciation rate by asset-life classification.

Revenue Expenditures (pg.418)

An expenditure related to plant assets that is expensed when incurred.The following lists identifies two common types of revenue expenditures:1.) Expenditures for ordinary maintenance and repairs of existing plant assets.2.) Expenditures to acquire low-cost items that benefit the firm for several periods.

Capital Expenditures (pg.419)

An expenditure that increases the book value of long-term assets.The following list identifies two typical capital expenditures related to property, plant, and equipment:1.) Initial Acquisitions and additions.2.) Betterments.These capital expenditures should also be debited to an asset account.

Capitalize (pg.419)

To capitalize an amount means to increase an asset's book value by that amount,

Betterments (pg.419)

Capital expenditures that (1) extend the useful life of an asset, (2) improve the quality and/ or quantity of the asset's output, or (3) reduce the asset's operating expenses.-Expenditures for betterments are generally debited to the appropriate asset account, and the subsequent periodic depreciation expense is increased to allocate the additional cost over the asset's remaining useful life.

Intangible Assets (pg.421)

Are the various resources that benefit a business's operations, but which lack physical characteristics or substance.Ex.-Exclusive rights or privileges-patents-copyrights-trademarks-Another intangible asset is goodwill, which reflects the beneficial attributes acquired in the acquisition of another company that cannot be attributed to any other recorded asset.

Research and Development Costs (pg.422)

Expenditures for the research and development of products or processes. These costs are almost always expensed rather than capitalized.GAAP guidelines require that these expenditures be expensed when incurred.

Amortization (pg.423)

The periodic write-off of an intangible asset to expense on a company's income statement.The amortization of an intangible asset carried on the balance sheet involves the periodic expensing of the asset's cost over the term of its expected useful life. Because salvage values are ordinarily not involved, the amortization of intangible assets typically entails (1) determining the asset's cost, (2) estimating the period over which it will benefit a company, and (3) allocating the cost in equal amounts to each accounting period involved. -Straight-line amortization is typically used for intangible assets unless another method is shown to be more appropriate.

Patent (pg.423)

An exclusive privilege granted for 20 years to an inventor that gives the patent holder the right to exclude others from making, using, or selling the invention.-an exclusive privilege granted to an inventor for a period of 20 years.

Copyright (pg.423)

An exclusive right that protects an owner against the unauthorized reproduction of a specific written work,recorded work, or artwork.-A copyright lasts for the life of the author plus 70 years.

Franchises (pg.424)

An exclusive right to operate or sell a specific brand of products in a given geographic area.

Trademarks (AKA Trade Names) (pg.424)

An exclusive and continuing right to use a certain terms, names or symbols to identify a brand or family of products.

Goodwill (pg.424)

The value of all attributes acquired in an acquisition that are not otherwise associated with other specific assets; calculated as the purchase price of the acquired company less the fair market value of identifiable net assets.-Unlike most intangible assets, goodwill is not subject to periodic amortization. -Instead, goodwill is evaluated annually for any impairment in value. ~If a company's goodwill is found to be impaired, the Goodwill account is written down to its fair value and an Impairment Loss is recorded on the income statement.

Return on Assets (ROA) (pg.426)

A measure of profitability; defined as net income divided by average total assets (or period-end assets).-The ability to use a firm's assets efficiently and effectively is the sign of a well managed company.-The rate of return on a company's assets is a commonly used measure of the overall company health.-The rate of return generated on a company's assets, referred to as the return on assets ratio, is widely used indicator that focusses on this dimension of a firm's financial health. Return on Assets= Net Income ------------------------------- Average Total AssetsThe numerator consists of the net income for the year from the income statement. The denominator in the ratio is the average balance of total assets for the year (sum the total assets at the beginning of the year with the total assets at the end of the year and divide the sum by two) obtained from the balance sheet.

Asset Turnover (pg.426)

Net sales divided by average total assets; it represents a measure of a firm's efficiency in producing sales revenue using its total assets.Asset Turnover= Net Sales ----------------------------- Average Total Assets