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Long lived assets
Tangible or intangible resources owned by a business and used in it's operations over several years.
- Physical substance; they can be touched.
- Property, plant, and equipment or fixed assets.
- Long lived tangible assets: Land, building, fixtures, and equipment, natural resources.
- Long-lived assets without physical substance that confer specific rights on their owner.
- Ex: Patents, copyrights, franchises, licenses, and trademarks.
Fixed Asset Turnover
- Net sales (operating revenues)/ average net fixed assets
- Measures the sales dollars generated by each dollar of fixed assets used.
- High rate suggests effective management
- Def: the net cash equivalent amount paid or to be paid for the asset.
- Acquisition cost includes the purchase price and all expenditures needed to prepare the asset
- for its intended use.
- Acquisition cost does not include financing charges and cash discounts.
- •Purchase price
- •Installation costs
- •Modification to building necessary to install equipment
- •Transportation costs
- •Purchase price
- •Real estate commissions
- •Title insurance premiums
- •Delinquent taxes
- •Surveying fees
- Land is NOT depreciable!!
search and transfer fees
Represents interest expenditures included in the cost of a self-constructed asset.
Ordinary repairs and maintenance
- Expenditures that maintain the productive capacity of the asset during the current accounting period only.
- Recorded as expenses in the current period
- Also called revenue expenditures: expenditures for the normal maintenance and upkeep of long-lived assets
Additions and improvements
- Expenditures that increase the productive life, operating efficiency, or capacity of the asset.
- Capital expenditures: increase the productive life, operating efficiency, or capacity of the asset and are recorded as increases in asset accounts, not as expenses.
Requires that a portion of an asset's cost be allocated as an expense in the same period that revenues were generated by its use.
- Process of allocating the cost of buildings and equipment over their productive lives using a systematic and rational method.
- Adjusting Journal entry need at the end of each period to reflect the use of buildings and equipment for the period.
- Depreciation Expense.........Debit
- Accumulated Depreciations....Credit
Net Book Value
Long-lived asset is it's acquisition cost less the accumulated depreciation from acquisition date to the balance sheet date.
Estimated useful life
Represents management's estimate of the assets/s useful economic life to the company rather than it's total economic life to all potential users.
Represents managements estimate of the amount the company expects to recover upon disposal of the asset at the end of it's estimated useful life.
- Method that allocates the cost of an asset in equal periodic amounts over it's useful life.
- Cost - Residual value = depreciable value
- Divide that by useful life and that is your depreciation expense.
- Accumulated Depreciation increases by an equal amount each year.
Units of Production Method
- Relates depreciable cost to total estimated productive output.
- (cost - residual value)/ Estimated total production X actual production = Depreciation Expense
- Dividing the depreciable cost by the estimated total production yields the depreciation rate per unit of production
Method that allocates the cost of an asset over its useful life based on a multiple of the straight-line rate.