accounting exam 2

days to sell --> rather than evaluate the number of times inventory turns over during the year, some analysts prefer to thin in terms of...

a measure of the average number of days from the time inventory is bought to the time it is sold---- 365 /inventory turnover ratio --> the length of time (in days) required to sell inventory

If you record sales in one period when they occur and bad debts in a different period when they are discovered, you will violate the _____ , which will lead to...

expense "matching" principle ... distorted views of Net Income in the period of the sale as well as in the period the bad debt is discovered

recording inventory sales: 2 possible times for transfer of control are ____ and ______ examples in this book assume that transfer of control occurs when goods are shipped (____), which means that....

FOB shipping point and FOB destination FOB shipping point; buyer pays for all transportation costs

purchases returns and allowances (analyze, record) when goods purchased from a supplier arrive in damaged condition or fail to meet specifications, the buyer can (1)_____ or (2) ________

a reduction in the cost of inventory purchases associated with unsatisfactory goods (1) return them for a full refund (2) keep them and ask for a cost reduction, called an allowance

lower of cost or market (LCM)

a rule that requires inventory to be written down when its market value falls below its cost

operating cycle

a series of activities that a company undertakes to generate revenues and, ultimately, cash

trademark

a special name,image,slogan identifies with a product or company

transportation cost (analyze, record) FOB shipping point FOB destination in general, a purchaser should include in the inventory account...... costs incurred after the inventory has been made ready for sale are treated as ____.

a term of sale indicating that goods are owned by the buyer the moment they leave the seller's premises a term of sale indicating that goods are owned by the seller until they are delivered to the buyer any costs needed to get the inventory into a condition and location ready for sale selling expenses

rule for tangible assets under the cost principle

all reasonable and necessary costs to acquire and prepare an asset for use should be recorded as a cost of the asset

least and latest rule

all taxpayers want to pay the least tax legally permitted at the last possible date

asset cost -def?

all the asset's capitalized costs (costs needed to acquire and prepare the asset for use)

direct write-off method

an alternative method that records Bad Debt Expense only when a company writes off specific accounts - although this method is easier to use, it overstates the value of Accounts Receivable and it violates the expense recognition principle (so not generally excepted)

residual (salvage) value -def?

an estimate of the amount the company will receive when it disposes of the asset

net assets

assets-liabilities

net assets acquired =

assets-liabilities

we need to record _______ in the same period as the sale

bad debts

the amount the bidder paid for the target exceeds the fair market value of what the bidder actually obtained from the acquisition (net assets acquired) HOW DO YOU SOLVE THIS PROBLEM?

by creating a "goodwill asset"

percentage of credit sales method

estimates bad debt expense by multiplying the historical percentage of bad debt losses by the current period's credit sales

When faces with increasing costs per unit, a company that uses FIFO will have a ______ income tax expense. --> this income tax effect is a ________

higher --> real cost

a change in method (LIFO vs. FIFO vs. weighted avg. cost) is allowed only if it.... a company can, however, use different methods for... _______ also limit the methods that can be used

improves accuracy of the company's financial results inventories that differ in nature or use, provided that the methods are used consistently over time tax rules

a write-off does not affect _____

income statement accounts note: The write-ff decreased both the total Acc. Receivable and Allowance for Doubtful Accounts by the same amount. So, the net receivable balance after the write-off is still the same as the net receivable balance before the write-off. Write-offs merely remove receivable balances that were previous;y accounted for as uncollectable.

Other costs that are expensed when incurred include...

insurance for fixed assets in use, interest on loans to purchase fixed assets, and ordinary repairs and maintenance

the time variable in the calculation int he interest formula depends on the ______

interest period, NOT the due date for the note

The time period is the portion of the year for which interest is calculated because...

interest rates are always stated as an annual percentage even if the note is for less than a year.

higher inventory turnover ratio tells us... a decline in the inventory turnover ratio tells us...

inventory moves more quickly from purchase to sale, reducing storage and obsolescence costs of an unexpected drop in demand for company's products or sloppy inventory management

allowing customers to use credit cards.... cost of credit card sales:

is one way to avoid lengthy collection periods credit card companies charge a fee for their services (around 3% of the total sales price)

unlimited life intangibles are.... the cost of limited life assets is...

not amortized spread on a straight line-basis over each period of useful life in a process called amortization

impairment --> if this occurs, the book value should be written down to _______ with the amount of the write-down reported as an ________

occurs when the cash to be generated by an asset is estimated to be less than the carrying value of that asset (when events/changed circumstances interfere with a company's ability to recover the value of the asset through future operations) -->what the asset is worth (fair value); impairment loss

impairment losses classifies as....

operating expense on the income statement, reported above the Income from Operations subtotal

methods for estimating bad debts

percentage of credit sales (easier to apply) aging of accounts receivable (more accurate b/c more data)

multistep income statement gross profit = gross profit is a ______, not an ______. Selling, General, and Administrative Expenses includes...

presents important subtotals to help distinguish core operating results from other less significant items that affect net income --> separates revenues and expenses that relate to core operations from all other peripheral items that affect net income (also called gross margin) net sales - cost of goods sold subtotal, account a variety of operating expenses

costs to be capitalized when ____(tangible asset)______ is acquired: -land -buildings -equipment

purchase cost legal fees survey fees title search fees purchase fees legal fees appraisal fees architect fees purchase/construction cost sales taxes transportation costs installation costs

bidder target

purchasing firm being purchased, becomes part of the bidder, paid by cash or stock of bidder

Recap of AFDA computations

recaps the difference between the Aging of A/R and the % of Credit Sales methods to compute amounts related to Bad Debts

allowance method 2 step process:

reduces Accounts Receivable (and Net Income) for an estimate of uncollectible accounts (bad debts). 1. make an end-of-period adjustment to record the estimated bad debts in the period credit sales occur 2. remove ("write off") specific customer balances when they are known to be uncollectible

technology

software and web development work

the depreciation method chosen for each type of property, plant, and equipment should reflect...

the pattern in which those assets' economic benefits are used up

types of inventory (w/ definitions)

HELD BY MERCHANDISERS: merchandise inventory: consists of products acquired in a finished condition, ready for sale without further processing. ------- HELD BY MANUFACTURERS: raw materials inventory: such as plastic, steel, fabrics --> work in process inventory: goods that are in the process of being manufactured --> finished goods inventory: ready for sale, like merchandise inventory

aging of accounts receivable method

estimates bad debt expense by estimating the ending balance to be reported in the Allowance for Doubtful Accounts - based on the "age" of each amount in Accounts Receivable - the older and more overdue an account receivable becomes, the less likely it is to be collectible

disposals of intangible assets result in...

gains/losses if the amounts received on disposal are greater/less than their book values

copyright

gives the owner exclusive right to publish, use, and sell a literary, musical, artistic, or dramatic work for a period not exceeding 70 years after the author's death

sales returns and allowances (analyze, record) --> reported on the _____ allowance using a ______ account instead of directly reducing the sales account allows the seller to track the value of _______.

refunds and price reductions given to customers after goods have been sold and found unsatisfactory --> income statement a reduction in the selling price contra-revenue; goods returned

write-off

removing an uncollectible account and its corresponding allowance from the accounting records - When it becomes clear that a particular customer will never pay, the company removes the customer's account from the accounts receivable records. By removing the the receivable, the company no longer needs to make an allowance for it, so they remove the corresponding amount from the Allowance for Doubtful Accounts.

to ensure bad debts and the allowance for doubtful accounts do not become materially misstated over time, companies...

revise overestimates of prior periods by lowering estimates in the current period, or they raise estimates in the current period to correct underestimates of prior periods

supplies vs. inventory

supplies: goods acquired for internal use inventory: goods acquired for resale to customers

costs have been capitalized when... capitalizing costs has these effects on the balance sheet and income statement

they are recorded as assets (rather than as expenses) -increasing assets -decreasing expenses

the costs of intangible assets are recorded as assets only if...

they have been purchased

impairment

the loss we record if we determine goodwill to be below its reported amount

research and development expenses -def: -the uncertainty about their future benefits requires that...

-expediters that may someday lead to patents, copyrights, or other intangible assets -they be expensed

extraordinary repairs, replacements, and additions -what are they? -they are recorded as... -sometimes called...

-infrequent, involve large expenditures, increase an asset's usefulness -long-lived assets (under the appropriate accounts) -capital expenditures

purchase transactions affect _______ accounts, whereas sales transactions affect _______ accounts purchase transactions are recorded at the merchandiser's _______, whereas sales transactions involve the _____ and ______ of the merchandiser's ________. summary of journal entries for purchase and sale transactions

balance sheet balance sheet and income statement cost selling price (SP) AND cost; inventory

notes receivable _______ from the day they are created to the day they are due (their _________) Although interest on a note receivable is earned each day, interest payments are received only one or twice a year. So,...

charge interest, maturity date a company with a note receivable needs to accrue Interest Rev. and Interest Receivable.

recovery - is accounted for in 2 parts:

collection of a previously written off account 1. put the receivable back on the books by recording the opposite of the write-off 2. record the collection of the account

consignment inventory - arises when... - reported on... goods in transit - reported on...

goods a company is holding on behalf of the goods' owner - ... a company is willing to sell the goods for the owner (for a fee) but does not want to take ownership of the goods in the event the goods are difficult to sell - ... the balance sheet of the OWNER, not the company holding the inventory inventory items being transported - ... the balance sheet of the OWNER, not the company holding the inventory

the receivables turnover ratio indicates... the higher the ratio,..., and thus..... a lower ratio can suggest...

how many times on average this process of selling and collecting is repeated during the period the faster the collection of receivables the shorter your company's operating cycle (which means more cash available for running the business) that the company is allowing too much time for customers to pay

goodwill is a "plug" meaning,...

it is determined relative to everything else (the most intangible of tangible assets)

summary of inventory turnover ratio analyses --> often, the company with the ______ gross profit percentage has the ____ inventory turnover

lower, faster

summary of sales related transactions by using contra revenue accounts, accountants/managers are able to ....

monitor and control how sales returns, allowances, and discounts affect the company's business operations

the bidder usually needs to pay.....

more than the current market price of the target shares in order to acquire that target

tender offer negotiated offer

open announced, public officer where bidder buys stock directly from target at a specified price and time bidder makes offer to buy stock from all shareholders under terms approved by a target's Board of Directors and s hareholders

any gain or loss on disposal on the income statement tells you as much about ____ as about_____

the method used to depreciate assets management's apparent ability to successfully negotiate the sale of long-lived assets

land improvements construction in progress

-a tangible asset -sidewalks, pavement, landscaping, fencing, lighting, sprinkler systems -deteriorate over time (whereas land lasts forever) -a tangible asset -costs of constructing new buildings and equipment -when construction is finished, these costs are moved from this account into the building or equipment account they relate to

useful life -def? -expressed in terms of __? -_____ is the only tangible asset that is assumed to have a ______ useful life

-an estimate of the asset's useful economic life to the company (not its economic life to all potential users) -may be expressed in terms of capacity -LAND, UNLIMITED USEFUL LIFE, SO LAND IS NOT DEPRECIATED

ordinary repairs and maintenance -what are they? -they are recorded as... -sometimes called...

-expenditures for the maintenance and upkeep of long-lived assets; recurring, relatively small expenditures that do not directly increase an asset's usefulness -expenses in the current period -revenue expenditures

long-lived assets

-resources acquired for use over one or more years, not intended for resale -allow the business to produce the goods and services that the business then sells to customers

depreciation -def? -____ is reported how often?

-the allocation of existing costs that were already recorded as a long-lived asset -depreciation expense is reported every period that buildings and equipment are used to make revenue

goodwill

-the most frequently reported intangible asset -encompasses good stuff such as favorable location, an established customer base, a great rep., and successful business operations -not allowed to be reported as an intangible asset on the balance sheet unless it has been purchased from another company

intangible assets include:

-trademarks -copyrights -patents -technology -licensing rights -goodwill

when costs are rising,.... when costs are falling,....

...FIFO produces a higher inventory value (making the balance sheet appear to be stronger) and a lower cost of goods sold (resulting in a higher gross profit, which makes the company LOOK more profitable). ...FIFO produces a lower ending inventory value and a higher cost of goods sold (a double whammy). These are not "real" economic effects though because the inventory cost flow assumption does NOT affect the number of units sold or held in ending inventory.

3 key differences in the balance sheet and income statement of a service company and a merchandising company:

1) Merchandisers report inventory as a current asset. Service companies often report supplies. 2) Service companies earn revenue from services. Merchandisers earn revenue from sales. 3) Merchandisers report an expense called Cost of Goods Sold, which represents the total cost of all goods sold to customers during the period. Service companies do NOT incur this expense (because they do not sell goods).

3 COST FLOW ASSUMPTIONS: 1. first-in, first-out (FIFO) 2. last-in, first-out (LIFO) 3. weighed average cost

1. assumes that the inventory costs flow out in the order the goods are received 2. assumes that the inventory costs flow out in the opposite of the order the goods are received 3. uses the weighted average of the costs of goods available for sale for both the cost of each item sold and those remaining *note: although they're called "inventory costing methods, their names actually describe how to calculate the cost of goods sold

acquisition journal entry (3 points)

1. bidder adds the target's liabilities and assets onto their own balance sheet using fair market values --> the bidder will estimate the fair market value of each asset and liability acquired and use those new variables when recording the purchase 2. the bidder should identify and include any intangible assets acquired from the target 3. the amount the bidder paid for the target exceeds the fair market value of what the bidder actually obtained from the acquisition (net assets acquired)

the 4 key events that occur with any note receivable:

1. establishing the note 2. accruing interest earned but not received 3. recording interest payments received 4. recording principal payments received

the value of inventory can fall below its recorded cost for 2 reasons:

1. it's easily replaced by identical goods at a lower cost 2. it's become outdated or damaged

the primary goals of inventory managers are to...

1. maintain a sufficient QUANTITY of inventory to meet customers' needs 2. ensure inventory QUALITY meets customers' expectations and company standards 3. minimize COST of acquiring and carrying inventory (including costs related to purchasing, production, storage, spoilage, theft, obsolescence, and financing).

types of synergy: -horizontal mergers (2 types) -vertical mergers (2 types)

1. minimize costs (eliminate redundant operations or departments--> produce cost savings called economies of scale) 2. increase market power 1. complimentary resources and strengths 2. one firm provides a product that can be used as an input to the other firm

3 variable to consider when calculating interest:

1. the principal: the amount of the note receivable 2. the annual interest rate charged on the note 3. the time period covered in the interest calculation

Disposal of depreciable assets require 2 accounting adjustments:

1. update Depreciation Expense and Accumulated Depreciation accounts --> if a long-lived asset is disposed of during the year, it should be depreciated to the date of disposal using partial-year calculations 2. record the disposal --> all disposals of long-lived assets require that you account for (a) the book value of the items given up (b) the value of the items received on disposal (c) any difference between the 2 amounts, reflecting a gain/loss on the disposal to be reported on the income statement

relationship between Inventory and Cost of Goods Sold cost of goods available for sale =

BI+P

cost of goods sold equation

Cost of Goods Sold (CGS) Ending Inventory (EI)

how can you tell whether an increase in a company's inventory balance is good news or bad news?

If the increase occurs because management is building up stock in anticipation of higher sales, it could be good news. But if it results from an accumulation of old inventory items that nobody wants, it is probably bad news.

interest formula

Interest (I) = Principal(P) x Interest Rate (R) x Time (T)

purchase discounts (analyze, record) "2/10" means... "n/30" means.... 2/10, n/30 meaning.....

a cash discount received for prompt payment of a purchase on account --> when inventory is bought on credit, terms such as "2/10, n/30" may be specified if the purchaser pays by the 10th day of taking ownership of the goods, a 2% purchase discount can be deducted from the amount owed if the payment is not made within the 10-day period, the full amount will be due 30 days after the ownership is transfrred 2 = % discount offered 10 = # of days in discount period n = "Net" purchase (after returns and allowances) 30 = maximum credit period

by calculating days to collect, you can compare... to .....

a company's collection performance to its stated collections policy

franchise

a contractual right to sell certain products or services, use certain trademarks, or perform activities in a geographical region

a note receivable is created when... notes receivable vs. accounts receivable

a formal written contract ("note") is established outlining the terms by which a company will receive amounts it is owed. 1. notes generally charge interest from the day they are signed to the day they are collected 2. notes are a stronger legal claim 3. a new note needs to be created for every transaction, so they are used less frequently (mostly for selling large dollar items, offering extended payment periods, lending money)

sales discount (analyze, record transactions for when a sales discount is offered to and later taken by the customer)

a sales price reduction given to customers for prompt payment of their account balance ex: 2/10 = 2% sales discount

factoring costs of factoring:

an arrangement where receivables are sold to another company for immediate cash (minus a factoring fee) 1. could send a potentially negative message because it might be seen as a last resort for collecting accounts 2. the factoring fee can be as much as 3% of the receivables sold

managers choose the straight-line depreciation method when... formula: the name straight-line suggests: (3 points)

an asset is expected to be used up in equal amounts each period of the asset's estimated useful life - depreciation expense is a constant amount each year - accumulated depreciation increases by an equal amount each year - book value decreases by the same equal amount each year

patent

an exclusive right granted by the federal government to the patent owner that prevents others from using, manufacturing, or selling the patented item for 20 years

periodic inventory system updates inventory records......

are updated "periodically," at the end of the accounting period. To determine how much merchandise has been sold, periodic systems require that inventory be physically counted at the end of the period. --> accurate records of the inventory on hand and the inventory that has been sold are unavailable during the accounting period (a drawback) --> based on the inventory count, ending inventory (EI) is determined and subtracted to calculate the the cost of goods sold ( CGS = BI + P - EI). --> These amounts are then used to adjust the balances for Inventory and Cost of Goods Sold

perpetual inventory system updates inventory records...

are updated "perpetually," every time inventory is bought, sold, or returned --> ex: scanners in wallmart --> balances in the Inventory and Cost of Goods Sold accounts are always up-to-date

goodwill satays on the balance sheet for this long:

as long as we deem it to be valuable

depreciation calculations are based on:

asset cost, useful life, residual value

inventory

assets acquired for resale to customers

if a customer pays on time for a sales discount, the seller accounts for the discount by using a ______ account (analyze, record) BUT if the customer doesn't pay by the end of the discount period, the seller ____________ and the customer __________, which would lead the seller to record ______. *NOTE: to be considered a transaction, a sales discount must occur _____ the initial sale has been made

contra-revenue does NOT allow the customer to take a discount for early payment has to pay the full amount of $ an increase in Cash (debit) and a decrease in Accounts Receivable (credit) for the amount paid after

Although the Allowance for Doubtful Accounts normally has a ________ balance, it may have a _____ balance before it is adjusted. - this happens when a company has recorded ______ that ______ previous estimates of uncollectible accounts If this happens, you can calculate the amount of the adjustment needed to reach the desired balance under the aging of accounts receivable method by...

credit, debit write offs, exceed recording am amount equal to the desired balance PLUS the existing debit balance.

recording depreciation causes an asset's book value to _____ as it ____ because depreciation is not intended to report an asset at its current value, an asset's book value could ____ its current value

decline, ages exceed

partial-year depreciation calculations: under the straight-line and declining-balance methods, the annual _____ is multiplied by ________ for the purpose of these calculations, accountants assume... partial-year modifications are not required in the units-of-production method because...

depreciation, the fraction of the year of which depreciation is being calculated the assets were purchased at the beginning of the month nearest to the actual purchase date that method is based on actual production for the period

the advantage of extending credit the disadvantages of extending credit

it helps business customers buy products and services, thereby increasing the seller's revenues the following additional costs are introduced: 1. increased wage costs - the company will have to hire people to (a) evaluate whether each customer is creditworthy, (b) track how much each customer owes, and (c) follow up to collect the receivable from each customer 2. bad debt costs - some customers dispute what they owe, or they run into financial difficulties and pay only a fraction of their account balances 3. delayed receipt of cash - if the company were to collect in full from customers, the business would have to wait 30-60 days before receiving the cash *note: most managers find that the gross profit to be gained from selling on account to business customers is greater than the costs mentioned above

a company should record depreciation each year of an asset's useful life until...

its total accumulated depreciation equals its depreciable cost

when one firm buys another, the bidder uses a _____ to _______ everything they're getting and giving up - add ___________ onto the bidder's books --this is called an _______

journal entry; reward -all the liabilities and assets of the target; acquisition journal entry

licensing rights

limited permissions to use something according to specific terms and conditions

1. tangible assets example: Cedar Fair purchases Top Thrill Dragster (roller coaster)

list price for the coaster was $26 mill Cedar Fair received $1 mill discount net purchase=$25 mill CF paid $125,000 to have the coaster delivered and $625,000 to have it assembled/prepared for use

tangible assets intangible assets

long-lived assets that have physical substance ex: lang, buildings, machinery, vehicles, office equipment, furniture, fixtures -typically "Property, Plant, and Equipment" on the balance sheet -known as fixed assets long-lives assets with no physical substance, usually indicated by legal documents ex: brand names, trademarks, licensing rights

shrinkage - managers can estimate this with a ________ - calculated by.....

loss of inventory from theft, fraud, and error - perpetual inventory system - subtract the cost of inventory counted from the cost in inventory recorded in the perpetual inventory system

the Allowance for Doubtful Accounts is a __________ account, like all contra-asset accounts Bad Debt Expense is a ______ account the explains why.....

permanent temporary the two accounts are not = on the balance sheet

a _________ system provides the best inventory control

perpetual

every merchandise sale has 2 components, each of which requires an entry in the _______: (1) ______ (2) ______

perpetual inventory system selling price cost *NOTE: gross profit is not directly recorded in an account by itself... its subtotal is produced by subtracting Sales Rev - Cost of Goods Sold

gross profit=

sales revenue-cost of good sold

retailers wholesalers

sell directly to individual customers sell their inventory to retail businesses for resale to consumers

service companies merchandising companies

sell services rather than physical goods sell goods that have been obtained from a supplier

subsidiary accounts the total of these accounts is reported as ______ on the ______

separate accounts receivable accounts (for each customer) Accounts Receivable, balance sheet

goods available for sale will either be ______ (reported as _____ on the _____) or will ______ (reported as _____ on the ____)

sold during the period cost of goods sold income statement remain on hand ending inventory balance sheet

managers choose the units-of-production depreciation method when... formula: under this method, _____, _____ and ______ ______(do this)____ from period to period, depending on the number of units produced

the amount of asset production varies significantly from period to period -depreciation expense, accumulated depreciation, book value -all vary from period to period

depreciable cost

the amount to be depreciated over the asset's life asset's cost-residual value

book (carrying) value

the difference between the Property and Equipment cost and the Accumulated Depreciation

a gain or loss on disposal represents...

the difference between the proceeds from selling the asset and the asset's book value (BV)

goodwill represents...

the expected synergies from the purchase or there is something valuable that you don't record under the value of an asset such as human capital

synergy

the increase in the value of the combined firm over the sum of the values of the independent firms

specific identification method --> this method requires accountants to....

the inventory costing method that individually identifies and records the cost of each item as Cost of Goods Sold --> ... keep track of the purchase cost of each item

inventory reports... sales revenue and cost of goods sold reports...

the merchandiser's total cost of acquiring goods that it has not yet sold (purchase price + freight-in) the total selling price and cost of goods the merchandisers did sell to customers during that period

the amount of depreciation expense recorded in each year of an asset's life depends on ____, meaning ______ reported can vary depending on this same thing different depreciation methods can be used for different classes of assets as long as....

the method used the amount of net income reported can vary depending on the method used the methods are used consistently over time

Rather than evaluate _________ accounts receivable turn over during a year, some people find it easier to think in terms of __________ it takes to collect accounts receivable (known as _____).

the number of times the length of time days to collect

depletion

the process of allocating a natural resource's cost over the period of its extraction or harvesting --> often use units-of-production method

inventory turnover --> analysis of inventory turnover can tell us...

the process of buying and selling inventory -->... how many times, on average, inventory has been bought and sold during the period by calculating the inventory turnover ratio

receivables turnover -evaluates....? when a company....... ,its receivables balance goes up when the company......., the balance goes down

the process of selling and collecting -the effectiveness of a company's credit-granting and collection activities sells goods or services on credit collects from customers

accounts receivable arise from... some accounts receivable are... 2 objectives when accounting for accounts receivable and bad debts are... - these objectives point to the solution of....

the sale of goods or services on credit never collected 1. report Accounts Receivable at the amount the company expects to collect ("net realizable value") 2. match the cost of bad debts to the accounting period in which the related credit sales are made --> reducing both Accounts Receivable and Net Income by the amount of credit sales that are unlikely to be collected as cash

when a "basket purchase" of land, buildings, and equipment occurs,... note: ___ is never used up

the total cost is split among the assets in proportion to the market value of the assets as a whole land

managers choose the declining-balance depreciation method when... sometimes called: formula:--> double-declining-balance depreciation method

they report more depreciation expense in the early years of an asset's life when they asset is more efficient and less in later years as the asset becomes less efficient an accelerated method (because it speeds up reporting depreciation) note: formula uses book value (cost-A/D) rather than depreciable cost (cost-residual value)

the basic idea of depreciation

to match the economic benefit that will be used up (asset cost - residual value) to the periods the asset will be used to generate revenue (useful life)

balance sheet looks like this for calculating goodwill

total assets-debit w (goodwill)-(debit) x liabilities-credit y cash paid to acquire company-credit z y+z=w+x

straight-line units-of-production declining-balance

when usage is the same each period when usage varies each period when the asset is more efficient (generates more revenues) in early years but less so over time; also used for tax