9 LongTerm Assets Management Issues Related to LongTerm
- Slides: 64
9 Long-Term Assets
Management Issues Related to Long-Term Assets OBJECTIVE 1: Define long-term assets, and explain the management issues related to them.
Key Ratio • Free cash flow
Figure 1: Long-Term Assets as a Percentage of Total Assets for Selected Industries
Figure 2: Classification of Long-Term Assets and Methods of Accounting for Them
Figure 3: Carrying Value of Long-Term Assets on the Balance Sheet
Table 1: Illustration of an Acquisition Decision
Figure 4: Issues in Accounting for Long. Term Assets
Management Issues Related to Long-Term Assets • Long-term assets have three characteristics in common: – They have a useful life of more than one year. – They are used in the operation of a business. – They are not intended for resale to customers.
Management Issues Related to Long-Term Assets • Tangible assets consist of property, plant, equipment, and natural resources. • Intangible assets consist of patents, copyrights, goodwill, and the like.
Management Issues Related to Long-Term Assets • The major accounting problem is the allocation of cost (as expenses) to accounting periods. – Property (not land, however), plant, and equipment are subject to depreciation. – Natural resources are subject to depletion. – Intangible assets are subject to amortization.
Management Issues Related to Long-Term Assets • Carrying value (book value) equals cost less accumulated depreciation. • All long-term assets are subject to an asset impairment evaluation.
Management Issues Related to Long-Term Assets • A standard measure of a company's capacity to finance long-term assets is free cash flow (Net cash flows from operating activities less dividends and purchases of plant assets plus sales of plant assets).
Management Issues Related to Long-Term Assets • Before investing in plant assets, cash inflows and outflows are analyzed. • Accounting for long-term assets requires proper application of the matching rule by resolving two issues: – How much of the total cost to allocate to expense in the current accounting period – How much to retain on the balance sheet as an asset to benefit future periods
© 2011 Cengage Learning All Rights Reserved. May not be scanned, copied or duplicate, or posted to a publicly accessible website, in whole or in part.
Acquisition Cost of Property, Plant, and Equipment OBJECTIVE 2: Distinguish between capital expenditures and revenue expenditures, and account for the cost of property, plant, and equipment.
Acquisition Cost of Property, Plant, and Equipment • An expenditure (a payment or incurrence of a liability) is one of two types. – A capital expenditure benefits more than one period and is recorded as an asset. – A revenue expenditure benefits only the current period and is expensed.
Acquisition Cost of Property, Plant, and Equipment • Additions and betterments (improvements) are capital expenditures and are debited to an asset account. • Extraordinary repairs increase an asset’s residual value or useful life. These capital expenditures are debited to accumulated depreciation.
Acquisition Cost of Property, Plant, and Equipment • Errors in properly classifying expenditures result in misstatements in assets and net income of the current and future periods.
Acquisition Cost of Property, Plant, and Equipment • The cost of a long-term asset includes the purchase cost, freight, installation, insurance while in transit, and any other costs required prior to operation. – The cost of land includes real estate commissions, lawyers’ fees, accrued taxes paid by the buyer, razing a building, draining, clearing, grading, assessments, and landscaping. – Land improvements include driveways, parking lots, fences, and signs.
Acquisition Cost of Property, Plant, and Equipment • The cost of a long-term asset includes the purchase cost, freight, installation, insurance while in transit, and any other costs required prior to operation. (cont. ) – The cost of buildings purchased includes the purchase price and repairs to make the building usable. – The cost of an asset constructed includes materials, labor, overhead, architects’ and lawyers’ fees, insurance during construction, and interest on a construction loan.
Acquisition Cost of Property, Plant, and Equipment • The cost of a long-term asset includes the purchase cost, freight, installation, insurance while in transit, and any other costs required prior to operation. (cont. ) – The cost of equipment includes the invoice price less cash discounts, freight, insurance, taxes, tariffs, buying expenses, installation costs, and test runs. – Interest on a loan to purchase an asset is expensed. Interest on a construction loan is capitalized.
Acquisition Cost of Property, Plant, and Equipment • The cost of a long-term asset includes the purchase cost, freight, installation, insurance while in transit, and any other costs required prior to operation. (cont. ) – All plant assets except land (i. e. , land improvements, buildings, equipment) are depreciated.
Acquisition Cost of Property, Plant, and Equipment • Leasehold improvements are amortized over the remaining term of the lease or the useful life of the improvement, whichever is shorter. • When a lump-sum purchase is made, the cost is allocated based on the assets’ relative fair market values.
© 2011 Cengage Learning All Rights Reserved. May not be scanned, copied or duplicate, or posted to a publicly accessible website, in whole or in part.
Depreciation OBJECTIVE 3: Compute depreciation under the straight-line, production, and decliningbalance methods.
Table 2: Depreciation Schedule, Straight. Line Method
Table 3: Depreciation Schedule, Production Method
Table 4: Depreciation Schedule, Double. Declining-Balance Method
Figure 5: Graphic Comparison of Three Methods of Determining Depreciation
Figure 6: Depreciation Methods Used by 600 Large Companies for Financial Reporting
Depreciation • Depreciation is the logical allocation of asset cost to the periods that benefit from the services of that asset. – Depreciable assets have limited useful lives because of physical deterioration and obsolescence.
Depreciation • Several factors affect the computation of depreciation. – Cost – Residual (salvage) value – Depreciable cost – Estimated useful life (in time or in units)
Depreciation • List the three most common methods of depreciation. – The straight-line method (based on the passage of time) • The formula for the straight-line method:
Depreciation – The production method (based on units produced, miles driven, and the like) • The formula for the production method:
Depreciation – The declining-balance method (an accelerated method) • The double-declining-balance formula: – The production method is a good application of the matching principle, but it can be used only if output over useful life can be estimated with reasonable accuracy.
Depreciation • List the three most common methods of depreciation. (cont. ) – Residual value is ignored initially, but an asset may not be depreciated below its residual value. – Compare three depreciation methods by referring to Figure 5 in the text.
Depreciation • Special issues in depreciation – Group depreciation saves time by depreciating a group of similar assets as a whole.
Depreciation • Special issues in depreciation (cont. ) – When an asset is owned for less than a year, only a partial year’s depreciation should be taken. • Under the half-year convention, one-half year’s depreciation is recorded in the year of purchase and one-half year’s depreciation is recorded in the year of disposition.
Depreciation • Special issues in depreciation (cont. ) – After an asset has been put into use, its estimated useful life or residual value may be revised. • Leave the previously taken depreciation unchanged. • Revise the useful life or residual value. • Allocate the remaining depreciable cost over the remaining useful life.
Depreciation • Special issues in depreciation (cont. ) – Accelerated cost recovery allows companies to take rapid write-offs of plant assets for tax purposes. This method is usually not acceptable for financial reporting purposes.
© 2011 Cengage Learning All Rights Reserved. May not be scanned, copied or duplicate, or posted to a publicly accessible website, in whole or in part.
Disposal of Depreciable Assets OBJECTIVE 4: Account for the disposal of depreciable assets.
Disposal of Depreciable Assets • An asset is disposed of when it is discarded, sold, or traded in. • Record depreciation for the period preceding disposal.
Disposal of Depreciable Assets • Journalize the disposal of an asset. – Debit Accumulated Depreciation and credit the asset account. – Debit any receipt of cash. – Debit or credit a loss or gain on disposal if cash received differs from the carrying value. – Credit asset for recorded cost.
Disposal of Depreciable Assets • Account for the exchange of similar assets. – For financial accounting purposes, losses are recognized, but gains are not. – For tax purposes, neither gains nor losses are recognized. • Account for the exchange of dissimilar assets. – Both gains and losses are recognized for both reporting and tax purposes.
Disposal of Depreciable Assets
Disposal of Depreciable Assets
Disposal of Depreciable Assets
Disposal of Depreciable Assets
© 2011 Cengage Learning All Rights Reserved. May not be scanned, copied or duplicate, or posted to a publicly accessible website, in whole or in part.
Natural Resources OBJECTIVE 5: Identify the issues related to accounting for natural resources, and compute depletion.
Natural Resources • Depletion – The allocation of the cost of a natural resource over the periods benefited. – Compute depletion, using the depletion formula. – Units extracted but not sold are recorded as inventory.
Natural Resources • Tangible assets used with natural resources should be depreciated over the shorter of the life of the tangible asset or the life of the natural resource.
Natural Resources • There are two methods of accounting for oil and gas development and exploration costs. – Under successful efforts accounting, only the cost of productive wells is capitalized. – Under the full-costing method, the cost of all wells is capitalized.
Natural Resources
© 2011 Cengage Learning All Rights Reserved. May not be scanned, copied or duplicate, or posted to a publicly accessible website, in whole or in part.
Intangible Assets OBJECTIVE 6: Identify the issues related to accounting for intangible assets, including research and development costs and goodwill.
Table 5: Accounting for Intangible Assets
Figure 7: Intangible Assets Reported by 600 Large Companies
Intangible Assets • Intangible assets (list examples) represent rights and privileges extended to their owner. • Other than goodwill, intangible assets usually are capitalized and expensed over their useful lives (not to exceed 40 years) in accordance with the matching rule.
Intangible Assets • Research and development costs are expensed. • Computer software costs are expensed until a product has been proved to be technologically feasible, then they are capitalized.
Intangible Assets • Goodwill is the excess of the purchase cost over the fair market value of the net assets purchased. – Goodwill usually is estimated based on superior past earnings. – For financial reporting purposes, goodwill is an asset to be reported as a separate line item on the balance sheet and is subject to an annual impairment review.
© 2011 Cengage Learning All Rights Reserved. May not be scanned, copied or duplicate, or posted to a publicly accessible website, in whole or in part.
- Financial assets and real assets
- Real assets vs financial assets
- Real assets vs financial assets
- The three plant asset disposal methods
- Plant assets natural resources and intangible assets
- Lanni products is a start up computer
- Plant assets, natural resources, and intangible assets
- Lts kernel
- York will end longterm solitary jails
- Two types of fitness components
- Health-related skill
- Unbhr
- Issues or problems related to local governance/autonomy
- Working capital and current assets management
- Managing assets vs asset management
- Managing assets vs asset management
- Network management concepts
- Management related images
- Management related images
- Erp in supply chain management ppt
- Categories of securities issue
- Managerial communication
- Current issues in human resource management
- Global issues in strategic management
- Issues management definition
- Contemporary management issues
- Implementing strategies management and operations issues
- Implement strategies management issues
- Chapter 7 strategic management
- Global and international issues in strategic management
- 5 layers of e business infrastructure
- Passive attack
- Five layer model of e business infrastructure
- Issues in operations management
- What is process management in tqm
- Information about social issues
- Management issues central to strategy implementation
- Implementing strategies management and operations issues
- Data center management issues
- Flexibility in operations management example
- Global issues in strategic management
- Implementing strategies management and operations issues
- Top management middle management first line management
- Management pyramid
- Top level management
- Tax liability definition
- Stranded assets
- Financial assets examples
- Great gatsby lesson
- Assets ninja
- Assets = liabilities + stockholders' equity
- Sears rating scale
- Units of activity method
- Securitisation and reconstruction of financial assets
- How to find average operating assets
- Risk weighted assets formula
- Sub soil assets
- Published account
- Value driven professional
- Examples of non current assets
- Doubtful 1 assets
- New era accounting grade 12 memo pdf module 1
- Media assets in games
- Residual income
- Ias 36 impairment of assets ppt