Financial Accounting Chapter 9

noncash charge or expense

A charge against earnings—either an expense or a loss—that does not require a cash expenditure at or near the time of recognition. Thus, the charge reduces net income but does not affect cash flows (except, perhaps, for income tax payments). Examples are depreciation and the write-off of asset values because an asset has become impaired. (p. 408)

units-of-output

A depreciation method in which cost (minus residual value) is divided by the estimated units of lifetime output. The unit depreciation cost is multiplied by the actual units of output each year to compute the annual depreciation expense. (p. 398)

sum-of-the-years' digits (SYD) depreciation

A long-established but seldom-used method of accelerated depreciation. Usually produces results that lie in between the 200 percent- and 150 percent-declining-balance methods. (p. 398)

straight-line depreciation

A method of depreciation that allocates the cost of an asset (minus any residual value) equally to each year of its useful life. (p. 390)

capitalize

A verb with two different meanings in accounting. The first is to debit an expenditure to an asset account, rather than directly to expense. The second is to estimate the value of an investment by dividing the annual return by the investor's required rate of return. (p. 388)

depletion

Allocating the cost of a natural resource to the units removed as the resource is mined, pumped, cut, or otherwise consumed. (p. 407)

fixed-percentage-of-declining-balance depreciation

An accelerated method of depreciation in which the rate is a multiple of the straight-line rate and is applied each year to the undepreciated cost of the asset. The most commonly used rate is double the straight-line rate. (p. 393)

capital expenditures

Costs incurred to acquire a long-lived asset. Expenditures that will benefit several accounting periods. (p. 388)

revenue expenditures

Expenditures that will benefit only the current accounting period. (p. 389)

plant assets

Long-lived assets that are acquired for use in business operations rather than for resale to customers. (p. 386)

accelerated depreciation

Methods of depreciation that call for recognition of relatively large amounts of depreciation in the early years of an asset's useful life and relatively small amounts in the later years. (p. 391)

natural resources

Mines, oil fields, standing timber, and similar assets that are physically consumed and converted into inventory. (p. 386)

tangible plant assets

Plant assets that have physical substance but that are not natural resources. Examples include land, buildings, and all types of equipment. (p. 386)

MACRS

The Modified Accelerated Cost Recovery System. The accelerated depreciation method permitted in federal income tax returns for assets acquired after December 31, 1986. Depreciation is based on prescribed recovery periods and depreciation rates. (p. 398)

present value

The amount that a knowledgeable investor would pay today for the right to receive future cash flows. The present value is always less than the sum of the future cash flows because the investor requires a return on the investment. (p. 402)

book value

The cost of a plant asset minus the total recorded depreciation, as shown by the Accumulated Depreciation account. The remaining undepreciated cost is also known as carrying value. (p. 390)

residual (salvage) value

The portion of an asset's cost expected to be recovered through sale or trade-in of the asset at the end of its useful life. (p. 391)

half-year convention

The practice of taking six months' depreciation in the year of acquisition and in the year of disposition, rather than computing depreciation for partial periods to the nearest month. This method is widely used and is acceptable for both income tax reporting and financial reports, as long as it is applied to all assets of a particular type acquired during the year. The half-year convention generally is not used for buildings. (p. 393)

goodwill

The present value of expected future earnings of a business in excess of the earnings normally realized in the industry. Recorded when a business entity is purchased at a price in excess of the fair value of its net identifiable assets less liabilities. (p. 402)

depreciation

The systematic allocation of the cost of an asset to expense over the years of its estimated useful life. (p. 389)

amortization

The systematic write-off to expense of the cost of an intangible asset over the periods of its economic usefulness. (p. 402)

net identifiable assets

The total of all assets minus liabilities. (p. 402)

intangible assets

Those assets that are used in the operation of a business but that have no physical substance and are noncurrent. (p. 386)

impairment loss

Writing down a long-lived asset for the difference between its carrying amount less its fair value. (p. 397)