FIN 350 - Final Exam

Leases

A contract between the owner of an asset - the lessor - and another party seeking use of the assets - the lessee.

Non-current Liabilities

A probably sacrifice of economic benefits in periods generally greater than one year in the future.

Cost Model

Allocate capitalized cost of a long lived asset over its useful life.

Current Liabilities

Are due within one operating cycle or one year.

Capitalized

Are the acquisition costs of most long-term assets expensed or capitalized (on balance sheet)?

Recoverability Test

Asset is impaired if the balance sheet carrying value is greater than the future undiscounted cash flow from the assets' use and disposal.

Lease Adjustments

Because operating leases do not appear on the balance sheet but may convey to the lessee most of the benefits and risks of ownership, the give rise to "off-balance-sheet financing".

Capitalizing vs expensing

Capitalizing firms have higher assets. Capitalizing firms have higher equity. Capitalizing firms have lower debt-to-equity and debt-to-assets ratios. Capitalizing firms have more stable income growth patterns. In later years, capitalizing firms have lower profitability.

Expensed

Costs are ___________ when incurred when intangible assets are developed internally (R&D).

Long-term Debt

Equals the present value of the remaining future stream of interest and principal payments.

Finance (Capital) Lease

Essentially a purchase, borrow money and buy asset

Operating lease

Essentially a rental in substance

Long-term assets

Expected to provide economic benefits over a future period of time, typically greater than one year. Tangible: PP&E Intangible: Patents, Trademarks Financial assets: Investments in debt or equity of other companies

Loss Measurement

If impaired, asset's value is written down to fair value. The loss is the asset's carrying value minus the present value of discounted future cash flows.

Impairment

Impairment charges reflect an unanticipated decline in the value of an asset (contrast with depreciation)

Sales-type capital lease

Lessor is typically a dealer or seller of the leased equipment. Sales amount is the present value of lease payments. Treated as if the lessor sold the asset and provided 100% debt financing.

Balance Sheet

Natural resources are shown on the _________ __________ as long-term assets. (Oil and gas reserves, mineral deposits). Must then be reduced as the resource is extracted and converted into inventory.

Intangible Assets

Non-monetary assets lacking physical substance. (copyrights, patents, trademarks)

Direct financing capital lease

PV of lease payments is the carrying value (cost) of leased asset. No gross profit recognized. Lessor is not a dealer of the leased equipment, rather a finance company.

Investment Property

Property owned for the purposes of earning rentals or capital appreciation or both.

Revaluation Model

Report long lived assets at fair value rather than acquisition cost less accumulated depreciation.

Matching Principle

States that if an asset contributes to generating revenues over a number of periods, we should spread the asset cost over its useful life. 1. Capitalize the assets (put on balance sheet) 2. Report depreciation expense in income statement each period. 3. If an asset has no impact or has highly uncertain impact on future earnings, it should be expensed.

Depreciation Methods

Straight-line, accelerated (double-declining), units-of-production method.

True

True or False: according to GAAP, both research and development costs are expensed on intangible assets developed internally.

Derecognition

When the asset is disposed of or is expected to provide no future benefits from either use or disposal.

Finance (capital) lease

With a(n) ____________ ________, the lessor reports a lease receivable based on the present value of future lease payments.

Operating lease

With a(n) _____________ _________, the lessor records lease revenue when earned (rental income).

Purchase price

_____________ is recorded as an asset on the balance sheet when an intangible asset is purchased in situations that are not business combinations.