Chapter 7 - Operating Assets

Cost

The amount of cash or cash equivalent sacrificed for goods and/or services that are expected to bring a current or future benefit to the organization.

Residual value (salvage value)

The amount of cash or trade-in consideration that the company expects to receive when an asset is retired from service.

Depreciation expense

The amount of depreciation recorded on the income statement.

Straight-line depreciation

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. Calculated each period by dividing the depreciable cost of an asset by the asset's useful life.

Units-of-production method

A depreciation method that allocates the cost of an asset over its expected life in direct proportion to the actual use of the asset; Depreciation expense is calculated by multiplying an asset's depreciable cost by usage ratio.

Impairment

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

Fixed asset turnover ratio

A ratio that indicates how efficiently a company uses its fixed assets. This is calculated by dividing net sales by average fixed assets.

Average age of fixed assets

A rough estimate that can be computed by dividing accumulated depreciation by depreciation expense.

Voluntary disposal

A type of disposal that occurs when a company determines that the asset is no longer useful; this 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 through theft, acts of nature, or by accident.

Patent

A type of intangible asset that grants the holder the right to manufacture, sell, or use a product. The legal life is 20 years from the day of the grant.

Declining balance depreciation method

An accelerated depreciation method that produces a declining amount of depreciation expense each period by multiplying the declining book value of an asset by a constant depreciation 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)

Franchise

An exclusive right to conduct a certain type of business in some particular geographic region.

Copyright

An intangible asset that grants the holder the right to publish, sell, or control a literary or artistic work. The legal life is the life of the author plus 70 years.

Trademark

An intangible asset that grants the holder the right to the exclusive use of a distinctive name, phrase, or symbol. The legal life is 20 years but it can be renewed indefinitely.

Goodwill

An unidentifiable intangible asset that arises from factors such as customer satisfaction, quality products, skilled employees, and business location.

Intangible operating assets

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

Operating assets

Assets used to generate operating income, consisting of usually cash, inventories, receivables, and property, plant, and equipment. Average operating assets are found by adding together beginning operating assets and ending operating assets, and dividing the result by 2.

Depreciable cost

Depreciable cost is calculated as the cost of the asset less its residual (or salvage) value. This amount will be the depreciated (expensed) cover the asset's useful life.

Revenue expenditures

Does not increase the future economic benefits of the asst. These are expensed as incurred.

Natural resources

Resources, such as coal deposits, oil reserves, and mineral deposits, that are physically consumed as they are used by a company and that can generally be replaced or restored only by an act of nature.

Organizational costs

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

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.

Depletion

The process of allocating the cost of a natural resource to each period in which the resource is removed from the Earth.

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.

Property, plant, and equipment

The tangible, long-lived, productive assets used by a company in its operations to produce revenue.

Accumulated depreciation

The total amount of the 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.

Book value (carrying value)

The value of an asset or liability as it appears on the balance sheet. Calculated as the cost of the asset or liability minus the balance in its related contra-account.