Operating Assets

Units-of-production depreciation method

A deprecation method that allocates the cost of an asset over its expected life in direct proportion to the actual use of the asset; deprecation expense is computed by multiplying an asset's depreciable cost by a usage ratio. Allocates the depreciable cost of an asset over its useful life based on its output during the period in relation to its total estimated output.

straight-line depreciation method

A depreciation method that allocates an equal amount of an asset's cost to depreciation expense for each year of the asset's useful life. Straight-line deprecation expense for each period is calculated by dividing the depreciable cost of an asset by the asset's useful life. allocates the depreciable cost of an asset in equal periodic amounts over its useful life

Impairment

A permanent decline in the future benefits or service potential of an asset. a permanent decline in the fair value of an asset relative to its book value

Impairment

A permanent decline in the future benefits or service potential of an asset. a permanent decline in the fair value of an asset

Fixed Asset Turnover Ratio

A ratio that indicates how efficiently a company uses its fixed assets. This ratio is calculated by dividing net sales by average fixed assets. The number of dollars of sales that are generated from each dollar of average fixed assets during the year, computed by dividing the net sales by the average net fixed assets.

Average Age of Fixed Assets

A rough estimate of the age of fixed assets that can be computed by dividing accumulated deprecation by depreciation expense. ____________________ = accumulated depreciation / depreciation expense

Voluntary disposal

A type of disposal that occurs when a company determines that the asset is no longer useful; the disposal may occur at the end of the asset's useful life or at some other time. A type of disposal that occurs when a company determines that the asset is no longer useful; the disposal may occur at the end of the asset's useful life or at some other time.

Involuntary Disposal

A type of disposal that occurs when assets are lost or destroyed though theft, acts of nature, or by accident. occurs when assets are lost or destroyed through theft, acts of nature, or by accident

depletion

Allocation of the cost of a natural resource over its service life The process of allocating the cost of a natural resource to each period in which the resource is removed from the earth.

Amortization

Allocation of the cost of an intangible asset over its service life The process whereby companies systematically allocate the cost of their intangible operating assets as an expense among the accounting periods in which the asset is used and the benefits are received.

Declining Balance Depreciation

An accelerated deprecation method that produces a declining amount of deprecation expense each period by multiplying the declining book value of an asset by a constant deprecation rate. Declining balance depreciation expense for each period of an asset's useful life equals the declining balance rate times the asset's book value (cost less accumulated depreciation) at the beginning of the period. Method that allocates the net book value (cost minus accumulated depreciation) of an asset over its useful life based on a multiple of the straight-line rate, thus assigning more depreciation to early years and less depreciation to later years of an asset's life

double declining balance method

An accelerated depreciation method that computes annual depreciation by multiplying the depreciable asset's decreasing book value by a constant percent that is two times the straight-line depreciation rate.

Cost

Any expenditure necessary to acquire the asset and to prepare the asset for use.

Depreciation Methods

Are the standardized calculations required to determine periodic depreciation expense. The most common are: Straight-line depreciation; Accelerated depreciation; Units-of-Production method

intangible operating assets

Assets that provide a benefit to a company over a number of years but lack physical substance. Examples of intangible assets include patents, copyrights, trademarks, and goodwill.

Revenue expenditure

Expenditures that do not increase the future economic benefits of the asset. These expenditures are expensed as they are incurred. A cost that keeps an asset in its normal operating condition and is treated as an expense

Capital Expenditures

Expenditures to acquire long-term assets or extend the life, expand the productive capacity, increase the efficiency, or improve the quality of existing long-term assets. Major investments in either tangible long-term assets such as land, buildings, and equipment or intangible assets such as patents, trademarks, and copyrights.

capitalized

Means that they are reported as long-term assets with a service potential of greater than 1 year.

cost allocation process

Process of assigning indirect costs to products, services, people, business units, etc.

Organizational costs

Significant costs such as legal fees, stock issue costs, accounting fees, and promotional fees that a company may incur when it is formed.

To revise depreciation expense, the following steps are performed:

Step 1: Obtain the book value of the asset at the date of the revision of deprecation. Step 2: Compute the deprecation expense using the revised amounts for book value, useful life, and/or residual value.

service potential

The benefits that can be obtained from assets. The future services that assets can render make assets "things of value" to a business.

Research and Development (R&D) Expense

The cost of internal development of intangible assets that is expensed as incurred.

useful life

The period of time over which the company anticipates deriving benefit from the use of the asset. The period of time over which an asset contributes to the earnings of a business.

Useful life (Also called salvage value)

The period of time over which the company anticipates deriving the benefit from the use of the asset.

Depletion

The process of allocating the cost of a natural resource to each period in which the resource is removed form the earth. Allocation of the cost of a natural resource over its service life

Amortization

The process whereby companies systematically allocate the cost of their intangible operating assets as an expense among the accounting periods in which the asset is used and the benefits are received. the process of allocating to expense the cost of an intangible asset

Depreciation

The process whereby companies systematically allocate the cost of their tangible operating assets (other than land) as an expense in each period which the asset is used. (Property, plant, and equipment.)

Depreciation expense

The process whereby companies systematically allocate the cost of their tangible operating assets(other than land) as an expense in each period in which the asset is used. the portion of a plant asset's cost that is transferred to an expense account in each fiscal period during a plant asset's useful life

Accumulated Depreciation

The total amount of depreciation expense that has been recorded for an asset since the asset was acquired. It is reported on the balance sheet as a contra-asset. the total amount of depreciation expense that has been recorded since the purchase of a plant asset

Depreciable cost

___________________ is calculated as the cost of the asset less its residual (or salvage) value. This amount will be depreciated (expensed) over the asset's useful life. the cost of a plant asset minus its estimated residual value

fixed assets

assets that are relatively permanent, such as land, buildings, and equipment

plant assets

assets that will be used for a number of years in the operation of a business

Property, plant, and equipment (PP&E)

assets with relatively long useful lives that are currently used in operating the business. For example, buildings, factories, automobiles, etc.

Operating Assets

long-lived assets that are used by the company in the normal course of operations

intangible assets

long-term assets (e.g., patents, trademarks, copyrights) that have no real physical form but do have value

Book value or carrying value

the difference between the cost of a long term asset and any depreciation taken to date. The value of an asset or a liability as it appears on the balance sheet. Book value is calculated as the cost of the asset or liability minus the balance in its related contra account (e.g., cost of equipment less accumulated depreciation; notes payable less discount on notes payable).