Financial Accounting - McGraw Hill; Ch. 7

Patent

An exclusive right to manufacture a product or to use a process.

Return on Assets

Net income divided by average total assets; measures the amount of net income generated for each dollar invested in assets.

Profit Margin

Net income divided by net sales; indicates the earnings per dollar of sales.

Asset Turnover

Net sales divided by average total assets, which measures the sales per dollar of assets invested.

Addition

Occurs when a new major component is added to an existing asset.

Impairment

Occurs when the future cash flows (future benefits) generated for a long-term asset fall below its book value (cost minus accumulated depreciation).

Franchise

local outlets that pay for the exclusive right to use the franchisor company's name and to sell its products within a specified geographical area.

Depreciation

Allocating the cost of long-term asset to an expense over its service life.

Amortization

Allocation of the cost of an intangible asset over its service life.

Declining-Balance Method

An accelerated depreciation method that records more depreciation in earlier years and less depreciation in later years.

Book Value

An asset's original cost less accumulated depreciation.

Copyright

An exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer software.

Accumulated Depreciation

A contra asset account representing the total depreciation taken to date.

Trademark

A word, slogan, or symbol that distinctively identifies a company, product, or service.

Accelerated Depreciation Method

Allocates a higher depreciation in the earlier years of the asset's life and lower depreciation in later years.

Activity-Based Method

Allocates an asset's cost based on its use.

Straight-Line Method

Allocates an equal amount of depreciation to each year of the asset's service life.

Natural Resouces

Assets like oil, natural gas, and timber that we can physically use up or deplete.

Repairs and Maintenance

Expenses that maintain a given level of benefits in the period incurred.

Goodwill

Goodwill equals the purchase price less the fair value of the net assets acquired.

Service Life

How long the company expects to receive benefits from the asset before disposing of it; also referred to as useful life.

Land Improvements

Improvements to land such as paving, lighting, and landscaping that, unlike land itself, are subject to depreciation.

Material

Large enough to influence a decision.

Intangible Assets

Long-term assets that lack physical substance, and whose existence is often based on a legal contract.

Basket Purchase

Purchase of more than one asset at the same time for one purchase price.

Capitalize

Record an expenditure as an asset.

Big Bath

Recording all losses in one year to make a bad year even worse.

Residual Value

The amount the company expects to receive from selling the asset at the end of its service life; also referred to as salvage value.

Improvement

The cost of replacing a major component of an asset.