What is property plant and equipment?
Long-lived resources that are controlled by the company.
What is included in the cost of land?
Purchase price, closing costs, addition costs to prepare land for use.
What is included in the cost of buildings?
If buying just the cost to buy it and make it ready for use, if you are building it, everything.
What is included in equipment costs?
Purchase price, freight charges, assembling, installing and testing.
What are operating expenditures?
Benefit only current period, required to maintain asset in normal operating condition.
What are capital expenditures?
Capitalized as an asset, increases life of an asset, it’s productivity, or efficiency.
What is depretiation?
Systematic allocation of cost of property, plant, and equipment over the asset’s useful life.
What are the three factors in calculating deprectiation?
Cost (purchase, etc.), Useful life (years, units it can produce), Residual value (Estimated amount to be received from disposal at end of asset’s useful life).
What are the different depreciation methods?
Straight-line, Diminishing-balance, Units-of-production.
Explain the Straight-line method?
Cost - Residual value = Depreciable amount, Depreciable amount / Useful life (in years) = Depreciation expense.
What is the Diminishing-Balance method?
Produces a decreasing annual depreciation, annual depreciation expense is calculated by multiplying the carrying amount at the beginning of the year by the depreciation expense.
Explain the Diminishing-Balance Method
100% / Useful life (in years) = Depreciation rate, Carrying amount at beginning of the year x Depreciation rate (straight line rate x multiplier) = Depreciation Expense.
What is the units of production method?
Useful life is expressed in terms of total units of production or activity expected from the asset . Useful for factory machinery, vehicles, airplanes, or any asset whose usage varies over time.
Explain the Units-of-Production Method.
Cost - Residual Value = Depreciable amount, Depreciable amount / Estimated Total Units of Production = Depreciation rate per Unit, Depreciation rate per unit x Unit of Production During the Year= Depreciation expense.
Explain Sale of property plant and equipment
Cost - Accumulated Depreciation = Carrying amount, Proceeds - Carrying amount = Gain (loss)
What does it mean when your proceeds are greater than your carrying amount?
Gain (cr)
What are intangible assets and goodwill?
No physical substance, (have rights like ip), must be identifiable
How are intangible assets accounted?
Recorded at cost including all costs to make asset ready for use. If finite life its cost must be systematically allocated over useful life.
What are some intangibles with finite lives?
Patents, copyrights, research and development costs.
What are some intangibles with indefinite lives?
Trademarks and trade names, franchises, licences.
What is goodwill?
Asset representing future economic benefits arising from purchase of business. Not amortized, but subject to annual test for impairment.
In what order are long lived assets presented in a statement of financial position?
Reported as non-current assets under headings: PLE, Intangible assets, goodwill. (disclose cost and accumulated depreciation (amortization) of each major class of assets.
How do we present long lived assets in a statement of income and statement of cash flows?
Income: Depreciation expense, amortization expense, gains and losses on disposal, impairment losses are included in operating expenses. Cash flows: Cash flows from purchase and sale of long lived assets are reported in investing section.
How do we measure return on assets?
= Net income/average total assets.
