Purchase Welcome to the sixth edition of Financial Accounting. It reflects our combined experience in teaching financial accounting to college students at all levels. For anyone who pursues a career in business, the ability to read, analyze, and interpret published financial reports is an essential skill. Financial Accounting is written for future business leaders who want to understand how financial statements are prepared and how the informa-tion in published financial reports is used by investors, creditors, financial analysts, and managers.
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LO2 — Determine which costs to capitalize and report as assets and which costs to expense. LO3 — Apply different depreciation methods to allocate the cost of assets over time. LO4 — Determine the effects of asset sales and impairments on financial statements.
LO5 — Describe the accounting and reporting for intangible assets. LO6 — Analyze the effects of tangible and intangible assets on key performance measures. Exercises Problems Cases and Projects 17 31 11,17 22 12, 13, 16, 18, 19 22 - 28, 32 14, 15 22, 24, 26, 35 36, 38, 39 40, 42 17, 21 31, 34 37 42 20, 21 29, 30, 33 40 - 42? Routine maintenance costs that are necessary to realize the full benefits of ownership of the asset should be expensed. However, betterment or improvement costs should be capitalized if the outlay enhances the usefulness of the asset or extends the asset?
As would be the case with any cost, an immaterial amount should be expensed as incurred. Capitalizing interest costs as part of the cost of constructing an asset reduces interest expense, and increases net income during the construction period. In subsequent periods, the interest costs that were capitalized as part of the cost of the asset will increase the periodic depreciation expense and reduce net income.
As any asset is used up, its cost is removed from the balance sheet and transferred into the income statement as an expense. Capitalization of costs onto the balance sheet and subsequent removal as expense is the essence of accrual accounting. If the cost of a depreciable asset is recognized in full upon purchase, profit would be inaccurately measured: it would be too low in the year of purchase when the asset is expensed and too high in later years as revenues earned by the asset are not matched with a corresponding cost.
The proper matching of costs expenses and revenues is essential for the proper recognition of profit. The primary benefit of accelerated depreciation for tax reporting is that the higher depreciation deductions in early periods reduce taxable income and income taxes. Cash flow is, therefore, increased, and this additional cash can be invested to yield additional cash inflows e. We would generally prefer to receive cash inflows sooner rather than later in order to maximize this investment potential.
Present and future periods are affected by such revisions. Depreciation expense calculated and reported in past periods is not revised.
Sales proceeds in excess of book values create gains; sales proceeds less than book values cause losses. The relevant factors, then, are the depreciation rate and salvage values used to compute depreciation expense, accumulated depreciation and the net book value of the asset, as well as the selling price of the asset. A PPE asset is considered to be impaired when the sum of the undiscounted expected cash flows to be derived from the asset is less than its current book value.
Research and development costs must be expensed under GAAP unless they have alternative future uses. Equipment relating to a specific research project with no alternative use would, therefore, be expensed rather than capitalized and subsequently depreciated. Accounting standard-setters have justified this? The difficulty with amortizing intangible assets is estimating the useful life. For some intangibles, the useful life is limited and can be easily estimated.
However, some intangibles have an indefinite life. This means that the useful life of the intangible is long and cannot be determined with any reasonable degree of accuracy. Under these circumstances, it is not appropriate to amortize the asset until the useful life can be determined. Goodwill arises whenever a company acquires another company and the purchase price is greater than the fair value of the identifiable assets acquired.
The amount of goodwill is the difference between the purchase price and the value assigned to the net assets of the acquired company. It is recorded as a long-term asset in the balance sheet. Since goodwill is assumed to have an indefinite life, it is not amortized. The only time that goodwill might affect the income statement is if it is determined that its value is impaired. In that case, an impairment loss is recorded in the income statement and the value of the goodwill asset on the balance sheet is reduced.
Expense Capitalize Capitalize the new equipment enhances the assembly line Expense — this is routine maintenance of the building, unless it extends the building? Capitalize — the useful life is extended f. Capitalize — this is a purchased intangible asset M Balance Sheet Transaction Sold furniture and fixtures for cash. Under U. Under IFRS, development costs are capitalized if there is the intention, feasibility and resources to bring the asset to completion, there exists the ability to use or sell the asset to generate an economic benefit.
Otherwise the costs must be expensed. Yes, impairment should be tested for annually. Year b. Oil reserve -A Balance Oil Inventory A 2,, 2,, -? PPE turnover rates increase with increases in sales volume relative to the dollar amount of PPE on the balance sheet. The PPE turnover rate is often a very difficult turnover rate to change, and typically requires creative thinking. Many companies are outsourcingthe manufacturing process in whole or in part to others in the supply chain.
This is beneficial so long as the savings realized by the reduction of manufacturing assets more than offset the higher cost of the goods as these are now purchased rather than manufactured. Another approach is to utilize long-term operating assets in partnership with another firm, say in a joint venture. In addition, operating expenses are increased, thus reducing retained earnings.
Plane -A Our concern isthat it will require higher capital expenditures in the near future to replace aging assets. However, PPE turns can also be improved by off-loading manufacturing to other companies in the supply chain and acquiring long-term operating assets in partnership with other companies, for example, in a joint venture.
The Receivable turnover improvement could be due to monitoring more closely the quality of customers to which credit is granted, implementing better collection procedures, and offering discounts as an incentive for early payment. Inventory turnover rates can be improved by weeding out slowly moving product lines, by reducing the depth and breadth of products carried, and by implementing just-in-time deliveries.
Adding inventories and receivables to get all the firm? Adams outsources most of its manufacturing and, recognizing concerns that these numbers might produce, reports in its 10K that its current facilities PPE assets are adequate for the foreseeable future.
Thus, although the ratios might suggest otherwise, the company does not anticipate large capital expenditures in the near future. Indeed this has been the case for the last several years as well.
Note the large amount spent by pharmaceutical companies Pfizer The companies in the list are paired by industry. It is interesting to see how similar some firms in the same industry are. As suppliers of technology hardware and software , Intel and Microsoft depend very heavily on their intellectual property.
As a result, their expenditures on research and development are among the highest of established firms. Apple has established itself as an innovator in technology and design and has spent billions of dollars developing unique products such as the iPad?.
From to , Apple? Yes, the equipment is impaired at July 1, because its book value is not recoverable through future cash flows. Impairment charge. Depreciation expense. Once we record the purchases and the depreciation expense, we can determine the cost and accumulated depreciation for the assets sold. Expensing rather than capitalizing and depreciating reduces assets, and the additional expense reduces profit and equity via the reduction in retained earnings. Agilent had a loss from operations in This has turned operating losses into an operating profit for the company.
In addition, a company can maintain its investment in intellectual capital and reduce expenses by outsourcing the activity to other countries where the intellectual resources are less expensive. The problem provides information directly to make entries i , ii , iv and v in part a. However, this leaves the property and equipment T-account unbalanced. A likely reason is that Target acquires some property and equipment without an expenditure of cash. Chapter 10 will cover capital lease transactions, which play a role in Target?
We eliminate construction in progress because these represent assets that the company is building. These assets are not yet in service and are consequently not yet depreciable. This elimination is also used in part c. Such a situation would negatively impact future cash flows. Most companies focus first on reducing receivables and inventories.
This is the so-called low-hanging fruit that can lead to quick results. Some possible actions includethose listed. Students will think of additional possibilities. Reducing receivables through: 1. Better underwriting of credit quality 2. Better controls to identify delinquencies, automated over-due notices, and better collection procedures 3. Increased attention to accuracy in invoicing 4. Offering early payment incentives b. Reducing inventories and inventory costs through essentially eliminating nonproductive activities including inspection, moving activities, waiting setup time: 1.
Use of less costly components of equal quality and production with lower wage rates 2. Elimination of product features not valued by customers 3. Outsourcing to reduce product cost 4.
ISBN 13: 9781618530448
Google Footnotes and Management Disclosures We incorporate footnote and other management disclosures, where appropriate, throughout the book. We explain the significance of the footnote and then demonstrate how to use the disclosed information to make managerial inferences and decisions. A representative sample follows. By weaving some analysis into each chapter, we try to instill in students a deeper appreciation for the significance of the accounting methods being discussed. One such analysis discussion follows.