Financial Accounting:: Tools For Business Decision-Making
Financial Accounting:: Tools For Business Decision-Making
Financial Accounting:: Tools For Business Decision-Making
CHAPTER
9
1. 2.
C H APT ER
Determine the cost of property, plant and equipment. Explain and calculate depreciation.
3.
4. 5.
6.
7.
2
CHAPTER
CHAPTER
CHAPTER
Types of Expenditures
1
Operating expenditures
Benefit only the current period
Immediately charged against revenue as an expense
Capital expenditures
Capitalized as an asset Benefit future periods
CHAPTER
Land
1
Cost of land includes
Purchase price
Closing costs such as title and legal fees Additional costs to prepare land for its intended use (less any proceeds from salvage)
CHAPTER
Land Improvements
1
The costs of structural additions made to land (e.g. paving, fencing) These decline in service potential over time
They are recorded separately from land
CHAPTER
Buildings
1
All expenditures related to the purchase or construction of a building When a building is purchased such costs include:
Purchase price
Closing costs (legal fees, title, insurance) Costs required to make building ready for its intended use
CHAPTER
Buildings (Continued)
1
When a building is constructed, its cost consists of:
Contract price Architect's fees
Building permits
Excavation cost Interest costs during construction
CHAPTER
Equipment
1
Costs include:
Purchase price
Freight charges and insurance during transit paid by the purchaser
Assembling
Installing and testing
10
CHAPTER
11
CHAPTER
Discussion Question
1
What are some of the expenditures that would be included in the cost of a specialized piece of equipment that a company ordered and had delivered from another country?
12
CHAPTER
Buy or Lease?
Advantages of leasing
Reduced risk of obsolescence 100% financing Income tax
Terminology
Lessor owner of asset for lease (e.g., landlord) Lessee company leasing asset from owner (e.g., tenant)
13
Copyright John Wiley & Sons Canada, Ltd.
CHAPTER
Finance lease
Treated as purchase by lessee (dr. asset/cr. liability)
Periodic payment (dr. liability and interest expense/cr. cash)
14
CHAPTER
Depreciation
1
Systematic allocation of the cost of property, plant and equipment over the assets useful life A process of cost allocation, not asset valuation Does not use or provide cash to replace the asset
15
CHAPTER
16
CHAPTER
Depreciation Methods
1
Straight-line
Used by the majority of Canadian publiclytraded companies
Diminishing-balance
Units-of-production
17
CHAPTER
CHAPTER
Straight-Line Method
Illustration 9-3 Depreciation is constant for each year of the asset's useful life
19
CHAPTER
Diminishing-Balance Method
1
Produces a decreasing annual depreciation expense over an assets useful life
Depreciation is calculated based on the assets carrying amount, which diminishes each year as accumulated depreciation increases
Annual depreciation expense is calculated by multiplying the carrying amount by the depreciation rate
Residual value is not included in the calculation
CHAPTER
21
CHAPTER
Units-of-Production Method
1
Useful life is expressed in terms of total units of production or activity expected from the asset
Such as units produced or machine-hours worked
22
CHAPTER
Units-of-Production Method
23
CHAPTER
Discussion Question
What would be the best choice of depreciation method for a fleet of company trucks if a company wanted the depreciation expense to track the wear and tear of the trucks?
24
CHAPTER
CHAPTER
CHAPTER
1. Update depreciation
CHAPTER
xxx xxx
28
CHAPTER
29
CHAPTER
If intangible asset has a finite (limited) life, its cost must be systematically allocated over its useful life
For intangible assets, this is referred to as amortization rather than depreciation
CHAPTER
31
CHAPTER
Development costs are capitalized only if associated with an identifiable, feasible product
Copyrights
Protection for the life of the creator + 50 years
32
Copyright John Wiley & Sons Canada, Ltd.
CHAPTER
Franchises
Contractual agreement to sell products or services
Licences
Operating rights
33
CHAPTER
Goodwill
1
Asset representing future economic benefits arising from the purchase of a business
Excess of cost over fair market value of net assets (assets less liabilities) acquired Represents the extra value relating to a business when it is purchased Only identified with the business as a whole
CHAPTER
Disclose cost and accumulated depreciation (amortization) of each major class of assets
Either in statement or in notes
CHAPTER
36
CHAPTER
Return on Assets
1
Measures overall profitability
Higher is better
37
Copyright John Wiley & Sons Canada, Ltd.
CHAPTER
Asset Turnover
1
Measures how efficiently a company uses its assets
Asset Turnover =
Higher is better
38
CHAPTER
Return on Assets
39
CHAPTER
40
CHAPTER
41
CHAPTER
Copyright Notice
Copyright 2012 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.
42
CHAPTER