Accounting Chapter 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

Depletion

Allocation of the cost of a natural resource over its service life

Depriciation

Allocation of the cost of a tangible asset over its service life.

Amortization

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

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 Depriciation

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

Tangible Assets

Assets in this category include land, land improvements, buildings, equipment, and natural resources

Natural Resources

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

Book Value

Equal to the original cost of the asset minus the current balance in Accumulated Depreciation.

Repairs and Maintenance

Expenses that maintain a good level of benefits in the period incured

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

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.

Intangible Assets

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

Equipment

Machinery used in manufacturing, computers and other office equipment, vehicles, furniture, and fixtures

Basket Purchase

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

Capitolize

Record an expenditure as an asset

Reporting intangible assets that are developed internally

Reporting intangible assets that are developed internally

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

Goodwill

The value of a company as a whole, over and above the value of its identifiable net assets. Goodwill equals the purchase price less the fair value of the net assets acquired

Activity Based Method

This method calculates depreciation based on the use of the asset. It is commonly used by companies that depend heavily on natural resources.

Declining Balance Method

This method is an accelerated method, meaning that more depreciation expense is taken in the early years than in the later years of an asset's life. The concepts behind declining-balance are also used in calculating depreciation for tax purposes

Straight Line Depreciation Method

This method simply takes an equal amount of depreciation each year. It is by far the most common depreciation method used in financial accounting.

Expenditures after Aquisition

We capitalize an expenditure as an asset if it increases future benefits. We expense an expenditure if it benefits only the current period

Recording Long Term Assets

We record a long-term asset at its cost plus all expenditures necessary to get the asset ready for use

Reporting Purchased Intangibles

We record purchased intangible assets at their original cost plus all other costs, such as legal and filing fees, necessary to get the asset ready for use.