ACCT2101 Ch. 3

What are the characteristics of intangible assets? What are some examples of intangibles?

"What allows us to have an advantage that others don't have." Intangible assets are long term assets that have no physical characteristics but are of value bc of the advantages or exclusive privileges and rights they provide to a business. Examples include patents, copyrights, franchises, capitalized software, licensed technology, and goodwill.

What is amortization? How is it computed?

Amortization is the systematic expensing of the cost of intangible assets. [Intangible Asset]Amortization Expense XX [Intangible Asset] XX

What is depletion? How is it computed?

Depletion is the exhaustion of a natural resource from the physical removal of the resource. Usually computed using the units of production method. Only the amount of depletion applied to units sold is an expense, the rest is inventory.

What is depreciation?

Depreciation is the amount of plant asset cost allocated to each period that benefit's from the use of the asset. Also defined as a process of allocating the cost of buildings and equipment (but not land) over their productive lives using a systematic and rational method. Depreciation is a process of allocation, NOT VALUATION. Noncash expense.

Why do companies record depreciation?

Doing so allows them to record their assets at the accurate book value. Book Value=cost-accumulated depreciation

How do you compute the fixed asset turnover? Total asset turnover? How do you interpret these two ratios?

Fixed Asset Turnover: Measures the sales dollars generated by each dollar of fixed assets used (Net Sales (or Operating Revenues))/(Average Net Fixed Assets) Total Asset Turnover Measures how efficient management is at using assets to generate sales (Net Sales (or Operating Revenues))/(Average Total Assets)

What is goodwill? How does it come about?

Goodwill is an intangible asset that will only occur in the financial statements if the company has purchased another company. It only comes about by way of an acquisition. Determined as the difference between the amount paid for the business (including debt assumed) and the fair market value of the assets purchased.

What is the impact of changes in depreciation estimates?

If an estimated life or residual value is found to be incorrect, then the current and future depreciation expense amounts are changes (it is an adjustment, not a correction)

How can a company record a gain when their assets are destroyed?

If the amount collected from the insurance company as a result of the destruction is more than what was the current book value of the asset, the company can record a gain on that destroyed asset.

What is the difference between definite and indefinite life intangibles?

Indefinite life intangible assets are not amortized (ex: goodwill) Definite life intangible assets are amortized at the shorter of the useful or legal life (ex: copyright: life + 70 years)

How do you record depletion and related transactions?

Journal entry at acquisition: Ore Reserves 3,600,000 Cash 3,600,000 Journal entry for extraction Ore Inventory 360,000 Accumulated Dep: Ore Reserves 360,000 (500,000 tons x $.72/ton) Journal entry for the sale of ore COGS 288,000 Ore Inventory 288,000 (400,000 tons x $.72/ton)

What are the steps of involved in recording disposals of PP&E assets?

all disposals require the following steps: 1) the asset's depreciation must be brought up to date 2) to record the disposal: Write off the asset cost (debit balance, so credit to take off the books), write off the acc. dep. (credit balance, so debit to take off the books), Record any consideration received or paid, record any gain or loss. The sale of a plant asset usually requires the recognition of a gain or loss. Gains and losses from the disposals of plant assets are considered to be nonoperating items.

Why does money have a time value?

-Inflation, depreciating real assets, investment opportunity -There is a utility cost of forgoing consumption today and you must be compensated for the disutility -the rate of return/ interest rate/ discount rate captures this tradeoff -Interest is always positive

What is a current liability?

A liability expected to be paid off within 12 months or less

What is the difference between the present value of a sum vs the present value of an annuity?

A sum represents a single disbursement of money at a given point, but an annuity represents equal recurring payments over time.

Review the various types of current liabilities and how they are computed and reported.

Accounts payable: obligation to pay in the future to a supplier, typically on credit Accrued Liabilities: expenses that have been incurred but not paid Deferred Revenues: revenue has been earned Notes Payable: company borrows money

`What is the difference among the three types of liabilities? What is the difference in how they are recorded?

CLEARLY DETERMINABLE: The existence of the liability and the amount of the liability are both certain (acct payable, wages payable, sales tax payable, interest payable) ESTIMATED: The existence of the liability is certain, but the amount can only be estimated (product warranty liability, pension liability) CONTINGENT: Existence of the liability and its value are both uncertain bc its existence is contingent on whether or not a certain event happens (Litigation liabilities)

What is impairment of goodwill? How is it recorded?

Goodwill is subject to an annual impairment test and is not written down unless there has been a permanent impairment of value. Impairment occurs when events of changed circumstances cause the estimated future cash flows to drop below book value. Recorded as the difference between the asset's book value and the fair value; written down to the fair value.

What are the common characteristics of liabilities?

Liabilities result from some past transaction and are obligations to pay cash, provide services, or deliver goods at some time in the future.

What factors determine how depreciation is calculated?

Major causes of depreciation include: Physical deterioration, inadequacy for future needs, and obsolescence. Factors that affect the computation of depreciation include: Acquisition cost, Estimated residual value, estimated useful life, and depreciation method selected.

What are the characteristics of natural resources? What are some examples?

Natural resources are long term assets that represent inventories of raw materials that can be consumed by extraction or removal. Extractive assets are ones that have part of it taken out. Natural resources include ore deposits, mineral deposits, oil reserves, and timber stands.

What are some alternatives names of plant assets?

Plant Assets Property, Plant, and Equipment Fixed Assets Buildings, Fixtures, and Equipment

What are the characteristics of plant assets?

Plant Assets: -are tangible -have a service life of more than one year -are used in business operations (resale is not the intent)

What are the three most common forms of depreciation? What are the underlying assumptions behind these methods? How do you compute depreciation under each of the depreciation methods?

STRAIGHT LINE METHOD: assumes that the passage of time is the main cause of depreciation. Dep/year= (cost-est. residual value)/number of periods in estimated useful life UNITS OF PRODUCTION: assumes that the physical usage of the asset determines the depreciation. Dep/unit is found as (cost-est. residual value)/(est. units of production), Dep/period is then found as (dep/unit) x (number of units produced) DOUBLE DECLINING BALANCE: applies a rate to a continuing eclining balance/emphasizes frontloaded depreciation. Calculated as (2 x S/L rate) x (Cost-Acc.Dep.)

What are some types of disposals of PP&E that occur in businesses?

Sale (usually recognizes a gain or a loss) Retirement Destruction (mostly losses, involves insurance)

What is an annuity?

Series of consecutive, equal, periodic payments

What is the difference between tangible and intangible assets?

Tangible assets are physical objects-that is, they can be touched. Three types of long-lived tangible assets are land, buildings+fixtures+equipment (property plant and equipment assets), and natural resources. Intangible Assets have no physical characteristics, but they confer specific rights to their owner that have value. Examples are copyrights, patents, trademarks, and franchises.

what items are included in the overall cost of plant assets?

The overall cost of a plant asset is equivalent to the purchase price of the asset

How do you record an acquisition of another company that includes goodwill?

Use the acronym AGCL (AGriCuLture) Assets (acquired) XX Goodwill XX Cash XX Liabilities XX

What is the impact on depreciation of part-year estimates?

When assets are acquires during an accounting period, then the first recording of depreciation is usually for a partial year. (ex: only 4 months instead of 12)

How do you compute working capital? What does working capital represent? Why is it so important to manage working capital effectively?

Working capital is the amount of money that the company has tied up in its current operating activities. Working Captial=Current Assets - Current Liabilities Financial managers pay special attention to the level of working capital of a company. Too little: inability to pay bills or take advantage of profitable opportunities. Too much: reduces profitability bc that capital has to be financed, usually through interest bearing loans