8/L6/2023

Flnancial Statements
eeI
Assets = Liabilities + Owner's Equity
Balance Sheet lncome Statement
Net lncome = Revenues _ Expenses

Cash Flow Statement

Activities: Operating, lnvesting, Financing

1 1
L

. Example Example
Let us say you start a business
To expand your business, you need more funds

I:y.h_.^yq 100 percent ownership (100 shares) for S10O

(Ihat is, lm shares worh Sr earh) Sell ownership or borrow funds

You use S100 to buy machine

Assets = Owner's Equity

100 = 100

3
4

Example
Example
Suppose you issue 40 new shares at S1 each
Suppose you need more funds to expand your business, however,
$40 is spent to buy some additional machines this time instead of issuing new shares, you borrow $5d from a bank
Total Value of Assets = 100 + 40 + 50 = 5190
Total Funds (Owner's): 100 + 40 = S140
Total Funds = 100 + 40 + 50 = s190
old equipment S10o
Total Value of Assets = Total Funds
New machine S40
Assets = Debt/Liabilities (S0) + Owner,s Funds (140)
Total Value of Assets = 5140
Charrge in own.trsllip r,

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Balance Sheet: Sources and Uses of Funds

The Balance Sheet
point Total Value of Assets = Total Funds
The financial position of an accounting entity as of a specified
in time
Assets = Liabilities + owner's Equity .
Also known as statement of financial position ' -i ' L----_T----J
Uses of Funds Sources of Funds
Two views:

Sources and Uses of Funds

Resources and Claims View

8
7

Resources and Claims View

Balance Sheet: Resources and Clalms Vlew *9gl.USS,9]1e-et:
Will shareholders get all the funds provided by them?
What happens during banl<ruPtcY?
paid S50 first
What will shareholders get? lf assets could be sold for $1g0, debtholders will be
What will lenders get? and then remaining amount (S140) goes to shareholders

However,
particular order
Assets are liquidated and stakeholders are paid in a are
When a bankrupt company's assets are liquidated, the proceeds
in.J.qrrt" to satisfy i00 percent of the creditors' claims, in urhiclt
Assets = Liabilities + Owner's Equity case owners receive nothing 4t9'V
"claim" only makes sense when company is liquidated
Lenders and shareholders mal<e
claim on companY's assets

10
9

Basic Accounti ng Concepts: Dual-Aspect

Baslc Accounting Concepts: Dual-Aspect its effect
records are Every accounting transaction can be described in terms of
Events that affect the numbers in an entity's accounting
on the fundamental accounting equation
called transactions
Assets = Liabilities + Owners' Equity
Every transaction has a dual impact on the accounting
records
Total assets must equal or balance, total liabilities plus owners'
Accounting systems are also called a double-entry system eq uity
+ Statement is called balance sheet

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 8/76/2023

. Basic Accounting Concepts: Dual_Aspect

Suppose Ms Jones starts a business Basic Accou nting Concepts: Dual_Aspect
Ms Jones spends g15,000 cash for
a new car
Opens a bank account in which
money
she deposits $40,000 of her own
= Liabilities+owners'Equity
fl
_;[[ -\
Now business has: h.o*€
^.serslcill (cish) d..reise
. An asset (cash) ^scB d)o
worth 540,000 Bv 515

. Owner (Ms Jones)

has a claim of g40,OOO against A$eB = Llabtttfles+Owne6, tqulty
this asset
crsh + car =Ll.bnue!+ owne6. Equjly
Assets = Equities
lnH.llrttwas 4O,m+O=O+40,@
40,000 = 40,000 Noq l4o,m_1s,m)+ $,@ =o +40,m

AiterrecodtnS thk tansaclton, the,undamenrat

equailon k SIiln batanc6

13
t4

. Basic.Accounting Concepts: Dual_Aspect

tnstead of using cash, Ms Jones
bou8ht a car (for $15,OOO) on Basic Accounting Concepts: Dual_Aspect
credit
Assets = Llabilifles + ,qrrvo*r"rf A company borrows S100,000 from
llIrtho.4e
a bank

A$ers {cn)
How will this affect balance sheet?
ince.se
3yS15.@ Ljabiiities
Byits,m
Total Assets = Liabilities + Owners,
Assets _ Uabiltties
Equity
+ Ownerc, Equity Ass€ts(cash) Linbilities
Cash + Car = Uab,lities +
increases by increase by
OwneE, Equlty
lnltlally, tt was 40,OOO + O=O +4O.OOO $roo,sgg Sloo,ooo
NoW 40,000 + 1S,OOO = 1S,OOO + 4O,OOO
Assets = Liabilitiu, * Owner,s Equitv
After r€cordint thk kansacilon,
cash -....................-
the fundamental equailon is stlll ln balance
Whal happens to the flm srze rn thrs Debt
ca!e?
Sloo,ooo Sloo,ooo

15
16

. Basic Accounting Concepts: Dual_Aspect

Company purchased inventory Assets
worth 55,000 and paid in cash
Assets = Liabilities + Owners, Equity
How will this affect balance sheet?
l-low .tre assets rr:corcled ?
Total Assets = Liabilities + Owners,
Equity
Acquisition value

-..--Assets . = Liabilities * owner,.Eorit, Fair value

tnventory Cash
5000 -5000 Val uation

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18

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 8lL6l2023

Current Assets
MonetarY Assets fAis€Tl= Liabilities + owners' Equity
" receive fixed sums of money
Monetary assets are money or claims to

Example: Accounts receivable, notes receivable and cash equivalents

Most nonmonetary assets are items that

will be used in the future in Accounts receivables

the production and sale of goods and services lnventories

Periodic and perpe!ual i'ventorv method
No separate classification appears on
the balance sheet Non-Current Assets i"i"ie*a' r""litre o, = Endins invenlorY
+
'ocs
'ale

sheet is between current

The traditional distinction on the balance
and noncurrent assets

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19

.
Types of Long-Lived Non-Monetary Assets
"as":eq'.'..Assets = Liabilities
.
rangible Asset: Plant and.equipm:U,i']:1::lil1,?9,'lI3il'""''
+ Owners' Equity or long-lived capital assets
;?ii:dffi;;;i, .'^i
"ir'"ltvp"s
Assets consist of monetary and nonmonetary
assets are usually listed on the
Long-lived tangible assets or fixed-assets
u.i.".c. rt'".til.derthe heading "property' plant' and equipment"
securities and other similar
Monetary assets: Money and marketabie
such as patent rights or
assets lntangible Asset: Has no physical substance
and machinery' and other copyrights
Nonmonetary assets: Land, buildings'
similar assets

Allassetsareinitiallyrecordedattheircost'thatis'attheprice
paid to acquire them

22
2L

Long-fived Non-Monetary Assets: Land

t-ong-fived Non-Monetary Assets: Land fana couta be sold for 5275,000
A business buys a plot of land for 5250'000
. at the amount of 5250'000 or s300,000?
Recorded in the accounts of the business For s250,000?

A year later the land could be sold

for 5275'000 Can value of land be accuratelY estimated?
statements?
How will this change reflect in accoullting NO
shown in an entity's
NO CHANGE The amounts at which nonmonetary assets.are
are shown in an entity's ...or"li
Jo indicate the fair values of these assets
The amounts at which non-current assets "ot
a" indicate the fair values of these assets the accounting records for
"..*rl. ""t lncreases in market value do not affect
these assets

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 8/16/2023

Long-Lived Non-Monetary Assets

Long-Lived Non-Monetary Assets: Cort
Nonmonetary assets: Fair values of these
assets not reported
Cor,*pt
The cost conci:1;t provides a rorativcry morc
objecLive ancr feasibie
--
However, users of financial statement system of accounting for non-monetary
are more interested in asset accounting
knowing what the business ana its inuiviauaiiiii,ii.riilLi]llrv
worth today than in what the assets cost Market value or current worth conceptwould
originaliy be costly as it requires
track of the fluctuations in fair values of
This is not consistent with which criteria? during each accounting period
i
"..f "**""1#V
..*t
Relevance? % Knowing this, investors will arrive at their
own estimate of currenr
Retiabitity, values by analysing the information ln
I
Objectivity? .""""'."...""...-ltruslworthiness.and
I
nonaccounting information
ttre report ail;;"
I
IVERIFIABILITY I
reasr bl tjty I

25
26

Assets
Monetary assets: Accounted for at their fair
Assets
%q&
value
Exception:
Acquisition (historicat) cost is the basis lf the entity acquires an asset by donation
l:J.T,::-._,:r.rsets:
suosequent accounting for the asset
for all or pays substantially less
than the market value of the asset, the asset
i, ,L."iJ"J.?'i,, rrir.
' C.ostof an item of property, plant, or equipment
includes all expenditures
val ue
that are necessary to make the asset reaOy .
for its intenjeJ r...- Example: A community donates land or
a building in order to induce a
company to locate there

28

Asset versus Expense

Low-Cost ltems: ltems that have a low
Long-Lived Non-Monetary Assets
unit cost such as calculators
and hand tools are charged immea.iately Long-lived no_nmonetary assets have long
lives and provide benefits
they may have a long life (materiality con.upti- "-- "r", ' ii"rgf,r "'"
as expen"s'e.
'' to the entity for several future years

Betterments versus Repair and Maintenance: The cost.of nonmonetary assets is matched
. Repair and maintenance
with the revenues
are obtained from its use in these future periods - -'-
- that
costs are ordinarily period costs: Keeps
in good condition the asset
but in no better co"aiti"" ,frl, *fr""'n
. Betterment *"r"0'r.n"r"U Nonmonetary assets are initially recorded as
converted to an expense in one or more future periods - -
is added to the cost of the asset: Makes
the u*ut [uitu, tnrn
an asset and is
it was when it was purchased or extends
its useful life beyond the original
estimate of useful life
The portion of the asset,s cost that is charged
to a given period is an
expense of that period

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30

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Long-Lived Non-MonetarY Assets

. Long-Lived
Non-MonetarY Assets -
of plant and
The accounting process of converting the original cost
equipment assets to expense is called depreciation

cost of a nonmonetary asset that has a long but limited life

is

systematically reduced over that life

concept
Depreciation in financial reporting is based on the matching

Matching ConcePt

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31

Long-Lived Non-Monetary Assets: Tangible Assets

Long-Lived Non-Moneta rY Assets has a life of 5 years
n machine was bought for $100,000 and
When intangible assets are converted to expenses' it
is called

a mortization Assume straight line depreciation

The accounting process of convertinB the cost of

these natural
Annual depreciation is 10O,0OO/5 = 520,000
resources assets to expense is called depletion
gas in the ground are
. Natural resources such as petroleum and natural Book value at the end of
usually reported as a separate category . First year loo,ooo - 20,000 = 580,000
. Second Year 8o,o0o- 20,000 = 560,000
Land is not amortized - useful life is assumed to be
indefinitely long
' Third year 60,000 - 20,000 = 540,000
. Fourth year 40,OOO - 20,000 = 520,000
. tifth year zero

Relationship between book value and real worth of the ass-et? '"--'

34
33

lnsurance Policy versus Depreciatlon

. lnsurance Policy versus Depreciatlon
expense Si rn i l.r ri ty?
Depreciation expense is conceptually iust like insurance
benefits to
Both insurance policies and plant and equipment.provide
ll 'lt r nr, l ihe entity over a finite number of accounting periods
The fraction oftotal cost that is an expense in a given year:
their original cost therefore must be charged as an
A fraction of
expense of each of these Periods
Plant and equipment: Difficult to estimate

lnsurance policy: Can be easily calculated

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35

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 8/16/2023

Depreciation
%'#sq!._

Three estimates are made for Depreciation: Service Life of an Asset

each depreciable asset;
Ttre n-umber of.accounting periods
over which the asset is expected
Service life of the asset to provide service (i.e., benefits) to *,e entity tfrii ;il;;ir:i,
Asset's residual value at the
end of its service life
The method of depreciation

38

Depreciation: Residual Value of

Any amount eventually recovered
un n*t Depreciation
through sale, trade_in, or salvage @@-.

Consider a piece of equipment purchased

Net cost ofthe asset to the entity for S1,000, which has
is the original cost less its
value, charged as an expense residual
over the asset,s life Estimated service life of 10 years

However, the estimated residual Estimated residual value of zero

value is generally so small or
uncertain that it is disregarded
The^objective of depreciation accounting
is to charge this net cost
S1,000 as an expense over the 10_year p'erio of

How much should be charged as an

expense each year?

39
40

Depreciation Methods
Straight-Line Method: Applied Depreciation Methods: Straight_Line
to net cost Method
Views fixed asset as providing its
Accelerated Methods services in a level stream

Declining Balance: Applied to book That is, the service provided (benefit
value received) is equal in each year
ot the asset,s life
Sum of years, Digit: Applied to net
cost
For.a piece of equipment with a
Net Cost = Original Cost
- Resjdual Value cost of $1,000, a zero residual value
and an estimated service life of 10 years
Eook Value = Original Cost
- Accumulated Depreciation
Annual depreciation expense is
S10O
OR
Equipment is said to have a depreciation rate of 10 percent per year

41
42

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 8lt6l2023

T.pr*"t.n Methods: Accelerated Methods

Depreciation Methods: Straight-Li ne Method Recognizes that the benefits proviled,af:l: greatest in the first
year
v..iiiih" asset's service life and least in the last
with age
Asset's mechanical efficiency tends to decline
1m Assume revenue is 52,000
. Maintenance costs tend to increase with age
100 900 rgm
.lncreasinglikelihoodthatbetterequipmentwillbecomeavailableand
100 800 19m D et.tt' p t: ittti r.ttt ti xl t c ns c=
make it obsolete
100 7m 19m oriilinol Cost - Rcsitlual V u'l'ue
5m Serulil! l,it years and less in the
e
Deoreciation expense is greater in the early
1m 1900
5m
;;;r;;;r. ;t iomparcd *ittt th" straight-line method
100 1900
100 4m rgm
100 3@ 19m Depreciation rate of 10
100 2m 19m percent applied to net cost
100 tm 1900

44
43

D.p*.",'r" Methods: Declining-Balance Method

D"p*."tr. Methods: Declining-Balance Method
the book
Each year's depreciation.is fo,ld qv iq?iVi:F.a rate to
asset as of the beginning of that
year
,rf r.'Jtn.
1@
(Book value = Acquisition cost ' Accumulated depreciation) 2@ 8m 18m
Assume revenue is 52,000
depreciation charges 160 640 1840
Asset's estimated residual value affects annual 128 512 ta72
102 410 1898 Depreciation rate of 20 Percent
328
82 1918
applied to book value
56 262 1934

52 210 1948

42 168 1958

34 134 1966

107

46
45

5"pt..i*ion Methods: Declining-Balance Method -o"pr..--r,lonMethods:Decllning-BalanceMethod

Depreciation BookValue Net lncome
Oepreciailon BookValue Netlncome
1m
. o=-r@
r [1i66'] 16;',
0
1 2@ fs6:1 18m
0.2 (1000)
2 160 640
r8m
1840
0.2 (800) z
3
rm
124
640
512
1840
la72
3 fia s12 1412 102 410 1898

4 102 410 1898 s a2 328 1918

5 a2 32a 1918 6 56 262 1934

6 66 262 1934 7 52 210 1948

52 210 8 42 168 19s8

7 1948
34 134 1966
a 42 168 r95b 9

9 34 134 1955

to 27 1O7 197t

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 8/16/2023

.Depreciation Vutf,odr, ffi . Depreciation Methods:Sm of tf,uGil6!1f,

sum of the digits (syD)
Oepr€ciarion Book Value Net tncome
= ryt)
2@ r8m
For example, for an asset with
estimated life of 10 years
-..!e
0.2 (640) : -*L Fiql
sr2
1840 SYD = t + 2... + to= 10(11)/2 = s5
L_L23J 7872
lo2 410 la98
82 32a 1918
65 262 Depreciation rate for first year t)/Sl,second
52 2to
tg34 = year = 9/55, so on
1948
42 158 1958
34 134 1966 Rate is applied to the net cost
of the asset

49
50

Depreciation Methods: Sum of tf,"

Vu*Gfr Depreciation Methods: Sum of thu
G;;6EE
NrAum of yeaB Oeprectafl on

k
1000 Book Vatue Net tncome
I 0.1818 182
2 0.1636 164
818
5s5
1818 Depreciation rate = r o.r8r8 I"l l *ru
1836
3 0.14sS . -fla-_ 2 0.1635 l& l8r8
145
65s t83E
i tilti ::: :r H
509
4 1855
:;uit of years / r
0,1273 t27 382 ^\
5
6
0.1091 109 213
1873

1891
(ji)'ooo
0.0909 9l 182 Nr is n, n-1", n-2, 5 0.1091 109 2n
7 0.0727
1909
6 0.0909 ;;;;
8
73 109 t927 and so on 91 182 1909
0.0545 55 55 194s
7 o.o72i 73 109
9 0.0364 8 0.0S4s Ss
tgzt
36
1964 ss 1945
0 Applied to net cost 9 0.0364 36 t8
10 0.0182 ,rri
18 o 1982

51
52

Depreciation Methods: Sum of the y;;;;Eit, Depreciation Methods: Sum of tf,u

V*o, Oigt,
Nr^umofyea6 Oeprecliilon Bookvatue
Neilncome
Nr^um of yearr Oepreclaion
Book Value Net thcome
r o.l8l8 r82 l$
2 01535 ml r8l8 *rr8
r E5s []6 . /^\ l o.r8r8 182
o.r4ss r4s .:: rsss 2 0.1636 164
l8r8
4 o.t273 127 {,i= ) rooo 3 o.r4s5 f"il
r
;:: T: /s\
\551 o.r273 *G- rsss
3
s o,os, roe ;:; 4 ;:: ;; ,1000
6 0.0s9 i:;i s
{
7
91 182 1909 o.,os, roe ;i: Hi
\551
O.O72j 73 rO9 6 0.0909 91
8 0.0545 tg27 lE2 1909
55 5s 1945
7 O,Oz27 73 109
_9 0.0364 36 ls 8 0.0545 SS ss
tg27
1o 0.0182 18 o
t9G4
9 0.0364 194s
1982 36 [ 1964
10 0.0182 18 o 1982

53
54

-
-

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 811612023

Depreciation Methods: ComPa rison

Methods: ComParison
. Depreciation
i:"r, ::i !i::tr:,,r,: arr1., l

snelshcune Doubl''Dlcllnln8 sum'ol'Year'Dltlb --

ftpftk&nkkvalueN€rhcmeerGhhhkulueNAh'ofr'Nr/SsmolY€aRepr"Etbnhkvalueh'ome
@ **$_
-- m IOO olsls 131 tll !313
r9m

ls
2@

123 s12 1s72 o1"5 r'5 # 1355

'- \"..
ld 139! o'r1" 91 4l 873
r@ d 19m 'lo 17! ! .---*:*
s ls 3' 19$ 0161 16 $9r
ffi 'u t1 131
1s o 19m 6 26t 19'4 o@ 19@

19s onl' 18 1927

rffi '!
rm & rs 4u 16 tgs8 oat
1966 o'il 1l $64
1@ '5
[ 0
19@ 27 il7 r9?1 o',ora2 1932

56
55

Boeing- Annual RePort

Depreciatlon Methods: ComParlson x 150
Oepreciation rate: StraiSht_line depreciation rate

Lca(Jived assels held lnt tale ate $lated at ihE iorver of @st
o' f'il talue less rosl lo seil Loolt lived

llleirlpai'mefilB the dillerenae

baled urEn fu urldrscounted tulute msl lws iithe asget' the arnou;loi
lretv;een tlie canlir'q annfil aild the 16r v'lue ol
lhc ecsel'

58
57

Depreciation: Disclosure
Apple - Annual RePort year must be
The amount of the depreciation charged off in the
disclosed in the financial statements

P.opeily, Ph.t and EquiPment

.:""i;' I li ;ii',1'::';i:.;",,..1**;i ljldfil####m#*#gm#::,]***

n?ndtseeNnG
iHH.#'+*#*ijilfi*f#*"l,ld,i,:U:;;,:"/.;,i'.:;-'"'|.,''|"rosi;'i4a:',' "o'i1eveq
:

'##,fl#,,q;;;*r:t;ru"'l::",;x";'ry

60
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 8/L6/2023

Methods: ComParison Depreciation Methods: ComParison

. Depreciation
a,${al o{red6ro, (h!rd's
Douhle_Oe'llnlns SlB o[Yea6'DlglB
StElghiune
tukvalue Neiln.ome Nr/sumofYens &pGn&. e*rur*
&p.e.nibn sekvalu. Neilncome erGlrion ,"1fl"
,:=im
m rs@ 01313 al 38 $rB
1m 19oo
r9m 1& @ lsoo 016'6 1316

gm 12s t[ 7an 1's s 13sc

o'11',3 127 1& SB
16 s ls 191s

1900 s ?6r r9l4 o@ r90e

51 llo 194s oa21 tt fr r92'

19m ts 55
rgoo .l ra lss8 069 194s
,5 13 l9A
1M

56
55

ReP-grt
, Depreciation
Methods: ComParison -9esiffi3nn$1,
oeoreciation rate: straight_line depreciation tate x 150
Propody. Plant and Equlpmant \\
t ({.e:rr. ,,ar,r if,rlllljI:g}Ld:]l!ffit r,o{ 1':1 hrJir\l aFpli'ai'le a(rls
,"il"i"1"ir",r+.*l;fi;;I6 i"t;;"" r'*c i:'arll l''.:l
rl:'-{11'.1e.

GffirrliMi*A$", ,.q""tati.iiest ol teirrainirg (et'Ieciahle nles a

i".r,iclw ,i.to," ln# *ry be srilrlefi to a tanagemefll tlan ftr 'ligpo9ilh'r'

rc
iffiiii'r crr.vrr'9.v*r-e ts
rhedine'ene
['J;:il#il;;:iffi#;-iil;;;il4;itheasser. tne arr'untoi|hein]pairme'tir
lair value ot $e asset
bel?ce; ils urryiilg atrttnt ard lhe

58
57

Apple - Annual RePort . Depreciation: Disclosure

year must be
- The amount ofthe depreciation charged off in the
disclosed in the financial statements

60
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 8/L6/2023

. Long-Lived Non-Monut.ffi
The book value of an asset usually
is not same as its market
value
Depreciation Expense:
The method used to allocate
Mm
However, if equipment was ."^ll of the asset's net cost to ea
end of first year for 5650, this of the accounting
accorrnrino p"ri"o i, ...'",f]:|li9t
nari^n i^ ,i,i.r.,li ; :;;:ffiii5[net each
varue?t ll?
was by definition its market
at that time
Managers cannot know in advance
51,000 original cost was presumably how long the asset will be used
its market value, when it was or what its residual value will
be
The amount of depreciation
The-first and last transactions expense that results from these
for the equipment take account JUdgements is therefore an estimate
market values of
ln the intervening periods. cha,nges
in. market values are disregarded
in the financial statements
,na ,ina"rfyint ,..;;il;; rlil;!.,

61
62

Significance of Depreciation
Depreciation expense is an all9s61len
of the original cost of an asset
lmpairedAssets
to the periods in which the aiset provides An asset for which its remain
il;?;i; i;;:;r.t,ty
trtiil;; -
as rileasureo
"-,,=,,- ds measured bybv the sum ot
Book value represents only
the future rach flowi ,..", ."':ql,:l:fits
casn ,n,^,. : assett use will generate, is less
of
that portion of the assets, original
cost
its book value than
charged to *,iJ,igr'i'r,'i',rii"r.,i.
:?::5il:J::l,"en "'pun," lmpaired Asset: Future Cash FIow
< Book Value
The amount shown as accumUlated lf the entity plans to disDose off,an
depreciation is that portion impaired asset, it is valued
b t9 a sse ts, o r is i n a I cost
t h a r, ;;;j; of tower of cost or fair value, less '' ,","= at the
the cosi of dir;;;;i '"
:1"^ 3-. ry:.i.
as expense against revenue
;; ;' t: n
"..:""n1.,. "o

-
63
I
64
I

,. I.rn B,a i req Art.,*_ _....

boug.ht equipment for Long-Lived Non-Moneta ry Assets
1-.^",T1..",
produce S1,OO0, expecting to use it to
a specific product for srx years
lre
The equipment was depreciated lAssetsl= Liabilities + Owners, Equity
using the straight-line method
Within three years, r.lrlrr,trrd lor
\ f Tansibte Assets
p,operry. ptd,,r.
thct pt..r(iuct clrop1.rr.r.l so \ [ d,,d eq,,ip,nenl
the company, xl).f t r Ll I lr.,t I h., /.r\rr much that
I 1,,,.\,, the at cosr and then book varue adiusred
generate over the remainder equipment would ffir*ffi;;l { li:;:JI#:l'*' ror

llrn.q,r1p1p, 111 r, r{.1 uoot(

of its product if" f *lrij'b",i
., r.,,.,,, ILar,J _ Not d"Drecirred
v,,rr,r, (SdOO)
Current Assets I

The equipment was therefore I tntangible Assets

written down to 5300, its estimated y;:lll*"-Amonized
fair value at the time of sale :l*::i over userur rire
. I
Negative impact on reported
income yil[]*' useful Life - Test for impairment (FcF
< Book
I
I tmpairment loss?
Ebmpte: Goodwilt
\
65
66

1,1.
 8lt6l2023

lntangible Assets
lntangible Assets Limited Useful Life
' intangibles or develop them
n Urrin'us can either acquire long-lived
i nternal lY Unlimited Useful Life

Afir:r:t ort llal;rtrr:tl shcetl'

DeveloP internallY

Acquired
are capitalized
Typically, acquired long-lived intangibles

68
67

Life
tnt-aneibte Assets: lndefinite Useful
lntangible Assets: Limited Useful Life as long-lived ass""lt"y]'l]19:$ersef
.ii'";,";;
intuneIUt", recognized
ul Iives
periods
urrrtti.onr"rt"d to expenses over a number of accounting ''l:; : I,?nH: *
;;;;, i ;; ii' u'" n ot a m o rt i z e d
"
Example: Patents impairment tests
Rather they are subjected to periodic
The svstematic allocation of the costs
of intangible assets.to the
ion
ffi;l;i;;hil ir''"v p'o'iae benefits is called amortizat FCF < Book Value

The method of amortization should

reflect the pattern in which the
or
..""""ri.u"."ilts of the intangible asset are consumed
otherwise used uP

l0
69

I ntangible Assets: Goodwill

lntanglble Assets: lndefinite Useful Life When one company buys another company'
the purchasing
considered,::.:"f*g:'.:- I.t:,"{: comp.anv than the fair
nn lnta-ngiUte asset's useful life is #;;;;;;p* more for the acquired
io,.n p'titiu"' eco n o m ic' or oth e r
:1" H':?;,':..:;i,lj#;lln;;il;, ,"iri net assets (assets net of any liabilities)
factors that limit its useful life "ti,t
Example: The buying company may be
willing to.PaY more.because
lf it is determined that an asset is itrpaired ir,,"'.'Joritla ."ripiny
i'as rntntg"ment team' a favourable
i""tiion ' 'iron[
in the marietplace' supierior production
methods' or
value and a charge
Carrvins value is written down to its realizable ot'her unidentif iable intangibles
equil t6 the write-down is made to income

12
1t

L2
 8/76/2023

I nta ngi ble Assets : Cood*F

. lntangible Assets: Goodwill
Ii:;.xt
net assets is recorded ., . ;
exceeds the fair varue of its
r;"r;ii;;;;ffi ; :l#;J#
il":.1:l ll"^t:1.-1:,".qrice Company A acquires Company
B, by paying S1.5 million cash
Goodwill: Excess of acquisition Company B;
cost over net assets acquired
Goodwill arises only as part of purchase Cash S50,Oo0
a transaction
Accounts Receivable believed
to have a realizable value of
560,000
Acquired assets are estimated to
have a fair value of S1.1 million

73
74

I ntangible Assets: Goodwill

lntangible Assets: Goodwill
Not amortized
Total Purchase price
s1,so0,oo0
Less It is subiected to an annual impairment
test
Cashacquired 5O,OOO
Accounts receivable Any write-down due to impairment
60,000 is charged to income
Oths acquired assets 1,1OO,OOO l,21O,OOO
Good*iil
---]26D00-

75
76

Boeing- Annual Report

lntangible Assets: patents and
Propony, plaDt and Equipment Copyrights
Patents, copyrights, and simil
P,opedv- pJairtsrileqlilpnl6nlereruco,{ed assets with limited useful
tives are initialty recorded .,,i'"1::'*?'o'"
rur,*rmm*ffi -qlffk'*lll{r#it'fr
lfixir:Ii{*J#ii,Jr[i'$1,?t-t*:y1 "u,no'i,evear;
lii:ffi
i,pi;iiuo
,:ig,"
tfrI*}
,l,e,nn,usu
lf they are purchased, the cost is
lf a patented invention is develepsd
the amount paid
rrsillq the siaigfi linLr within the company, howeve6
tnr;odi{?ltv e$ftjare rhc meurod over s yesrs. we
i,,c,ud,n0 asseis har o1a, "pr,r"r,iriiir"".itl-tll2ed
# #;;;iil;";:,ff:1i:iJ';i1::';*J:f.:,*sisnerj ro rone"riv;(r assers. the costs involved ordinarily are
not capitalized
. These are considered
to be research and development
costs

77
78

13
 8lL6l2023

Assets: Research and Development Costs

lntangible Assets: Patents and Copyrights -lntangible for the purpose of developing new or improved
over the Costs incurred
The cost of intangible assets with useful lives is amortized goods, processes, or services
useful life of the asset
after five
(e g" 17 year for a May provide benefits until future periods, for example'
lf the useful life is limited by agreement or by law yeaisor more after a research pro,ect is started
patent), the amortization period cannot be longer
periods
of . Capitalizing R&D costs and amortizing them over the
It mav be shorter if the company believes that because benefittediosts (treated as an asset)
i".r."ti*i.rr .Jr"n.", or. othut tuasons, the practical life will be
OR
shorter than the legal life
R&D costs be treated as period costs
(treated as an expense)

80
l9

ntangible Assets: Software Development

lntangible Assets: Research and Development Costs
I

The costs of developing computer software

to be sold' leased' or
Future benefits to be derived from current R&D
efforts are highly
licensed are a tYPe of R&D cost
u ncertain

these proiects Thesecostsmustbeexpensedasincurredupuntilthepointthatthe

There is no obiective way of distinguishing between iecnnotogic.t feasibility of the software product
has been
and the unsuccessful ones
esta bli shed

can be
Thereafter, the costs of bringing the software to market
ca pitalized

6Z
81

Apple - Annual RePort

I ntangible Assets: Software Development
years
A product with an estimated market life of four ilcosl'Uopctrar'Gilscu'no'ilc!lryuseorlt'eJr-'gnrl4Fnnn'doverFLesIrrrleJ
P'oordvltinlridoq({]me|lorf'rclod
,(pftilnlcs-trnen"c,s.wrn(irnL.la's"f"":;;'io*"'"'tr"";r''il'er'rcu'rhruilh'v'nrhhqilqL'rr'p"o'c
in the first year would
Half of its estimated lifetime revenues coming ffiJ'J;::'ffi";i",il;;;;;.;-;;L;l:.:yr:1til3l",*:1"*lm'U:Ly":l;H:il11;Iflff,iii:::,",1,[.1;:
i"'n"i,, *uu r, o,*t.rd
trr'iruvcn'Ptils
first year re
frave nalt of its capitalized cost amortized in the

(Matching - Revenues and Costs)

84
83

t4
 8/L6/2023

. Apple - Annual Report

Novartis - Annual Report

Goodwlll and pther inta*gibla ase*te

Good.rrJill and (tlher ifiiangible assets are capitali;te.,
mthe, such sssets aBr@undlo be and
clrcrilnslancos hdrcnb hil he assets
may&

::*i"l3Jlwo
I.c Lompnnt cs(abtshod
rnr'hqiD e asretr drrrrq 20r6. ?ort.ro 20.a Fo;
rcportirq unils b1.."d .n ,r rmpairment on a yearly hasls.lf necessary
urs m mr-Med ilrdabs bcach raPiling an impakment
gmeilkflsprimantyaltrate
::*:lt**:i:11,1:l*,{;;:;#il; l;i
btX€tureil;sandEuruFr€porungu1ils, unil. :t ;, ;";;Tl;i
h rc16 i:,itux:"1;t
and AOI;, he loirs is recognlzed.

85
86

lntangible Assets: Goodwill

Consider following factors:
lntangible Assets: Goodwill
. Knowledge and skills Brand name, reputation, clientele, or similar
that are built up as a business operates intangible resources of
. Happy employees the purchased company
. Customer loyalty
Goodwill appears in the accounts of a company
only when the
Do they create value for a company? company has purchased another company
Can they be treated as asset?
Does company pay anything (specific The amount by which the purchase price
exceeds the fair value of
amount) for acquiring these
the acquired company,s net assets ii reported '"
assets? .r g;ol;ill
Will they appear on company,s balance sheet
as assets?

87
8B

, lnta aFip le A:sgts ;G-qgdyylt I

I ntangible Assets: Goodwill
lri!::t.!!!iilis.Bt!115::i i!t3li! .

,ili;;;i;i ;rrijriiLr.:.. i.iii:riii,: irii.:h:,.:.i

irrrr,tt.i a(!:Il,irt.tl\ lrr.,.,-

I$tioqibh *sel,i
1?(hiloloE.

{:lJlrnilrr (ruluals
rod r.htloilsltip$
Iia r:r. flyf.r(oins,Ja,sfr rjrr,t, l.\.ri.r,Ed trs tixbiiltri
r nrstu\. ,:r,,in[ri,, s ihN.J ri
uirlr:., utnU,,,ll t"r, ii,.
rU A""i,p*..,3i",,,t,n
^"l.r,."ili.
rry DxP.irit( ,r dr .r{Efltri ,

89
90

15
 8lL6l2023

I ntangible Assets: Goodwill

JlstgHls#,:s!*-qe9-dwill
i.I csdvilland d.s idanSibie Esel3 i:.;;i;J;ia,;;i* -- --- :'"diii's i:.rti litltts f rurir;t
I J{sns$ nl.l*q$ ir {t.ru!N8,r!ot$ C}NN'll r:irivl[{ ]iJlli]uKntrl PIl((
is.ii,r;o$5: l,:&***{idiig
;n]ount 1llo'xl'al
. ,, ',r:r!,,iyr lh. Jn i. k{r.:} ,( cu,,hl lflJr {a$Wh[!
n,r<ss'a ir.riaiiilul,.giil::Nilb: ik,4ucljrn\*r
ti,i,;i:;ia,i. jr,- ---:it _ --'-
,il *srBrJ BrlsBs, rolo,(4,r(,rL (aJri8" *r-iir
,.' ,lr dr ,,:d ,', rid't!,
',il cr1,r" t'qu"il'
'r
{s I n'"rui:illlr: al:i l:i
'liiijhni({l iiriit-li.r\' - }i ii
hr.idis(tu!.,n,Nr.. I - rl) 'fr.t(lL :] l,
liil,r]. -

ffi ..rr,r,'i,itl {jlr:l.i:ii{#:ii'rl:l ii};i,,ffi:{i

t,1rihrxxti...,iilxranrrrxr,.!r-'{.+\rhrili-l{ilrd'x
((xhu'x,r'
x<hn,ixir.trcit:n,{aJ'l4iiltF('dll$,itrkhftl
$rj,,il.i,r.ji:,'r+r(?1j,,i(krrnl,ilirriJrr:il$s*'
iiii)-iq.l3l:r:.rt.$rs$......
t:Jr rtr I,j!r{i oln:{inr!.xr:r
, irrnr.s..,!Dbilr!" n N rll^i:.
t.ll.{.'t,:tl r, tttt.,.'lt
rrn.i i,risl.iQiiliiP:r : ... .
t9
..... ii.ll
1't i
11,)
2::
nji:(11!, \!i'iil l?tr{i: lnar rl.
",,,.,.,:..i",,,,r,-qr,i,,".u".,r'.1,.,il
,.i rrri,,. .rl, u,,+, t,-" , I s7n.iiz3 ,l ilr NIkin" . Jit. ro" ''r,r '.1 o*-'.r ;,qu,.,t, [r, r\ ?rt r{} t']'*d l')
TIr rlr'l nrr, "tS ,.crhh rrr'r ' hqFa rti iwlril l' "...: la .:i
r .uv nrp,,rxflr d ilr: ni.rlril!
in) nntlrrrrn n rlr rPJnnq *!'\nr i\.l elr't *
,.r'rJ.nrrn ilr,{'O' !u,Prn' (ifi

92
91

lntaneible Assets: Goodwill

G o..o d w i II @^w. *-:-:-_-;_
*!g!engj!lg-AP'9".ejs-:. ru.'".*,".. .."y**.n"'ffrffi]rrrh'rhrerdrNn'lL ir';x{' m'+'xrr"61

::.5,:ix'!rdili,sd ilt*i ir*ivrllrt:l* n$ej*!

A rx',.rrtt i .h*x$. n, rhr
',"v,, .nrrult
'i aI*liil
i. rJ irllrvr .
,t .. ,!ii,:.ii,... t

r{t:rtD, iltl{t,, Xa! l:}

t.d4i[ * tl'!tr iiqrlrrj+tr
r!l:i inl'

j:+,,i,. r.,r..*.'{itiM.::IrLlt!l
\ '!,,.',,..\. ,.!,,jLnr.il,. r ,{ ,il!\rIJ rr ,,r ('L;lr' .i r,runfr
.,ir Llr . J'lilrh l\r!il:r,,rtr' ti." \il rqL- Ji ttrc \ lr'riltr':t i.., ,. ,rf..r l
rr- .1,,,i,*r,'t Jcr*-, n'i.r,sn*' ri' r '$ rl rJ
.'ny rcr,.,ro, n l' .,ar\\ r.6rr'r ir'l' +lai "
n?.' *J tnnr,.l ina'F rl i.i.nj)

94
93

Long-Lived Non-MonetarY Assets

lntangible Assets: Goodwlll
ik..'dhistr,nd jn,ni r'h [$-rJ iirylL *r,tl(r,i*Id, rri{ rL'rLrr. }.,r (n Lllq|
= Liabilities + Owners' Equity
sl

Tangible Assets
Property, plant, and equlPment
lnltially recorded at cost and then book value adjusted for

fi""r*"rtAtill depreciation
Land - Not dePrecialed

Current Assets lntangible Assets

Linrited Useful Life - Anrortized over useful life

Unlirnited Useful Life - Test for iilrpairment {fCF < Book

Va lue)
lnrpairment loss?
Exanrple: Goodwill

96
95

t6
 8/1.6/2023

MonetaryAssets
Monetary assets are money or claims Monetary Assets
to receive fixed sums of money Monetary assets are initially recorded
Cash, certificates of deposit, and at their cost
accounts receivable are reported at
.rr-r,r ,. j."r,iii.riJ,
reatizabte amounts (which in the Subsequently accounted for at their
case fair value
deposit), are the same as face amount "t
", Fair Value: Amount at which a
y.:1:li!1.9".ba
,:r1..!
and equity securities are reported
at either cost or
current transacti"; tti*L",,li?ri;:t;,1l:
or Iiquidation sale
j:ffiiffi inil ?o,..0
::l*11 holding
regarding "atue,
depending on the company';
the securities
il;;;i;;,
- 5?IfXiT.fl|ffi
.,?HfJI,
lff ';'""'o su rpl us ca sh in 100,000 sh a res

llow will you determine the fair value

of its investment?
Share price multiplied by number
of shares

97
98

M,qneleryAq*H_
Monetary assets are initially recorded
at their cost
,.MerskruA9.is$...
The concepts governing the amounts
at which they appear on the
Subsequently accounted for at their batance sheet subseouent to their initial
fair value
these two categories
,".;;;iiiJr";i;t
air.r. for.
Why fair value?
Non-monetary assets: Appear on the
Relevant - Relevant to readers of balance sheet at unexpired
accounting reports cost (regardless of its market valuel,
exceptloi in-v-er,;;il""
. Amount not yet written
Feasibility - Can be readily determined off as an expense (Acquisition cost _
objectively at a low cost Depreciation)
Objective?
Monetary assets: Cash is reported at
its face amount, accounts
receivable at its estimated value
while
assets are accounted for at their fair
,"ri"t
tfr" illnu,ury
value "if,r"r.

99
100

Mene(?ry Ass. gst__. . . . _...

Cash Monetary Assets: Marketa ble Securities
He,ld-to-maturity securities: Debt security
Certificate of Deposit: lf an entity that the entity intends to
has a temporary excess of cash, hold to maturity, reported at cost
it
receive i;;;;ri ;;;'" "' '
may loan the excess to a bank and
Trading securities: Debt and equity
Receivables: Accounts receivables, securities held for current resale,
trade receivables, loans reported at market value with any
fo"n to urpfo;;;;- "" '
receivables, interest receivabf", unrealized gain or loiiel ot the
period inctuded in the catcutation'of
tf,e peiLi;i i;;;'" '
Marketable Securities: Commercial paper,
treasury bills, stocks, Available for sale securities: Debt
and equity securities that do not fit
,,h" above two categories, reportej
:Il_"-1."f
unreatized gains (or losses) of the period
.i rrit"i
rlir", ,"V
an owners,
are Ji."iiiv ir"ji
f"r.
.0,"1::"^1L1" r..ornt (that is, aies,noiitor*ft,rorgr,
"a
rne rncome statement as "qrity
it does in the case oitriJing,".Jritiurf

101
1-02

17
 8/t612023

Financial Statements: Balance Sheet

Monetary Assets
purpose of exercising
Capital stock of other companies held for the
some control over those companies, or stocks
and bonds not traded Assets = Liabilities
on a securities market are reported as investments

-\
Paid-ln Capital + Retained Earnings
*-*--\
Funds provided bY lncreases if revenue increases
investors Decreases if expense increases

1.04
103

Relation between Net lncome and Owners' Equity

Relation between Net lncome and Owners' Equity
iupporu products costing 5500 were sold for 5750 cash
Suppose products costing S5OO were sold for 5750
cash
How will this affect balance sheet?
Net lncome = 750 - 500 = 250 Dual aspect?
Total Assets = Liabilities + Owners' Equity,
Total Assets = Liabilities + Owners' Equity **--T;;;,"
-500 + 750 = capitar (runds
How will this
-500 + 7l50= Provided bY shareholders)
equation balance?
-"--
Assets - lnventorY Assets - Cash Difference of 5250
2. Retained earnings
{inconre)
decrease by S500 increase bY $ 750 Liabilities?
Owners' EquitY? Retairled eorninBs
increase bY 5250

106
105

Relation between Net lncome and Owners' Equlty

Relation between Net lncome and Owners' Equity
Balance Sheet
Assets = Liabilities

lncome Statement
Assets = Liabilities + Owner's Equity
Revenues - ExPenses
tr*-"ntory crth Retained
Ea rnings A revenue is an increase ln retained earnings
-soo 75o 25o
An expense is a decrease

108
L07

18
 8/t6/2023

. ls Income Same as lncrease in Cash? Summary

not necessarity mean that the owners are
[li:1"::jl:.lsh,does
better off (that is, the retained earningi po.tion Items of PPE are capitalized at their acquisition
cost
increased)
oit-l,uir-u;;;;;::
A portion ofthe net cost is charged as depreciation
expense to each
lncrease in cash may be merely offset of the accounting periods in which the .r;"4;;;ri;; ;;;;;
by a
. Decrease in some other asset
. A corresponding reduction is made each period
lncrease in a liability in the book value of
the asset account
(and therefore no effect on retained
earnings)
Land is not depreciated

109
Lto

Summary
. Summary
When an asse-t is disposed oi its cost and
accumulated depreciation lntangible assets also are recorded at cost
are removed from the accounts, and any gain
or loss appelrs on tfre
income statement
Goodwill is the difference between the.price paid
for a company and
Natural resources are accounted for in the same the fair value of the net assets acquired (acquired
way as fixed assets .s.eti neiot any
except that the expense item is called depletio, lia bil ities)
depreciation
;ili;;';;
lf intangible assets have a limited useful life, their
cost is amortized
over that life

lntangible assets not subject to amortization

are periodically tested
tor impairment

11t
1,12

Summary
Summary
R&D costs are expensed as incurred
Accounting for long-lived assets involves making
estimates that
Costs of developing marketable computer re-sult in each. year,s depreciation and amortizat'ion
lxception: software
expected to be recovered from future sales oetng approximations "*puniu'.rorn,,
Capitalized once the product,s technical feasibility Since these amounts affect income in each year
is established of an asset,s life,
reported income itself is an estimate

113
t1

L9
 8lL6/2023

Depreciation Methods
then
Question in quiz/exam: lf depreciation method is not specified
assume straight-line method

115

20