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Date Created: 11/05/14
ACCT 215 09302014 Chapter 2 Quick Review What does the income statement show Revenue Expenses Profit What does the balance sheet show Shows what firms own assets and what they owe liabilities and the Stockholders Equity Why would change in cash not be equal to profit Cash can not change hands but still show up on the income statement Business Forms Sole Proprietorship Single owner Partnership Multiple owners partners Corporation limited liability cannot take personal property Private Stocks held by founding families or close to family Publicly Traded Open to everybody who wishes to purchase stock Standards GAAP Generally Accepted Accounting Principles for publicly traded Who creates it Finance Accounting Standards Board Who enforces it Securities Exchange Commission Financial Statements Balance Sheet A snap shot of what firms own and owe at a given point in time Income Statement A report of the economic performance of the firm over a time period Statement of Stockholders Equity A report of transactions with owners over a period of time Statement of Cash Flows Sources and uses of cash over time Balance Sheet Assets Resources of the firm things that provide value Currentnoncurrent Current will be converted into cash within 1 year Liabilities Sacrifices of resources Currentnoncurrent Owners Equity Residual claim to assets once liabilities are satisfied ownership Contributed capitalretained earnings Recording Transactions Assets Liabilities Owners Equity Assets Resources L E Claims against resources Each transaction will have a dual effect double entry accounting To analyze you need 3 pieces of info what accounts are effected the direction of the effect the amount Debits and Credits Assets Left hand side Liabilities Equity Right Hand Side Debits are left hand side Credits are right hand side For asset accounts debits increase credits decrease Debit cash increase Credit cash decrease For liability and equity accounts debits decrease credits increase So when you borrow money you will credit a payable Debits and credits must equal Journal entries are the formal means of recording transactions using debits and credits format like so Debit Account Credit Account Note Optional le purchase a coffee for 3 Coffee 3 Cash 3 le Kim and Kelley each contribute 20K to form a business Cash 40K Cont Capital 40K le Uncle Bob agrees to lend them 20K for the business Cash 20K Loan Payable 20K le They purchase 5K worth of gear for sale Inventory Gear 5K Cash 5K le They purchase 35K in bicycles and parts Inventory Bikes 30K Inventory Parts 5K Cash 35K le They spend 10K in getting the storefront ready Property improvement 10K Cash 10K On a TAccount all debits are added to the left side and are totaled at the bottom all credits are added to the right side of the T and are totaled at the bottom Each account needs a separate T Account Every journal entry must be linked to two or more T Accounts Add reference numbers to easily tie it back to the transaction Trial balance The trial balance aggregates the ending balances of all the T Accounts Final Step before building the balance sheet Quick Review What is the balance sheet equation A L SE In a transaction if an asset increases what must the offset be Decrease in A or increase in L or SE What are the two categories of Shareholders Equity we discussed Contributed Capital amp Retained Earnings Retained earnings is the accumulative net income that has not been paid out to shareholders O9302014 Chapter 3 Multistep income statement has three sections Operating revenue Operating expenses Operating income Other items Investment income Interest expense Gainloss on asset sales Income taxes Net income Shareholders Equity Contributed Capital Retained Earnings The Retained Earnings Equation Ending Retained Earnings Beginning Retained Earnings Net Income Dividends Net Income Revenue Expenses Net income increases retained earnings hence increasing shareholders equity O9302014 Revenue increases net income Increasing retained earnings Increasing shareholders equity Expenses decrease net income Decrease retained earnings Decreasing shareholders equity Quick Review The income statement captures inflows and outflows of economic resources to a firm over a period of time Can be related to operations Can be non operating When a transaction features an inflow our outflow of economic resources from the firm it must affect the income statement The firm earned revenue The firm incurred expense Important we must record economic activities on the income statement in the period when they occurred regardless of cash changing hands When balancing the balance sheet equation Revenues increase equity Expenses decrease equity Note we will never use Retained Earnings when recording income statement transactions 09302014 It must be either revenue or expense Note dividends decrease retained earningsequity but are not on the income statement The Big 2 accounting equations Assets liabilities sharehoder s equity Ending retained earnings beginning retained earnings net income dividends YOGA 3 You receive cash totaling 800 for classes Cash 800 A Revenue 800 SE Your instructor teaches classes during the month You agree to pay 600 for classes 300 is paid on October 15 and 300 will be paid on November 2 Cash 300 A Wage expense 600 SE Wage payable 300 L You pay rent for October of 1000 on October 1 Cash 1000 A Rent expense 1000 SE You use utilities totaling 200 This amount is payable on November 15 Utility payable 200 L Utility expense 200 SE You receive a cash refund for defective inventory with an original cost of 140 Cash 140 A Inventory 140 A 09302014 You receive 1500 in cash for classes 1000 is for classes in November the remainder is for 2 month passes for November and December Cash 1500 A Service Revenue 1250 SE Unearned Revenue 250 L You sell inventory costing 150 for 225 Cash 225 A Sales Revenue 225 SE Inventory 150 A COGS 150 A You refund a dissatisfied customers class fee of 15 Cash 15 A Service Revenue 15 E You pay the outstanding wages from October Cash 300 A Wages Payable 300 L Debits and Credits Retained earnings is an equity account Increased with a credit O9302014 Decreased with a debit Net income increases retained earnings Revenue increases net income Increases with a credit Expense decreases net income Increased with a debit Note revenue and expense can go in the other direction but is uncommon Transaction Journal The sold bicycles for 7500 Their original cost was 5000 Cash 7500 Debit Sales Revenue 7500 Credit Inventory 5000 credit COGS 5000 Debit They sold gear for 800 0G cost 400 Cash 400 Debit Sales Rev 400 Cred COGS 400 debit Inventory 400 credit They provide a variety of services to customers Cash 420 Debit O9302014 Service Revenue 420 Credit COGS 45 Debit Inventory 45 Credit They sell 2 fender sets for 35 each The customers pay an additional 10 for installation The original cast was 20 each Cash 90 debit Sales revenue 70 credit Service revenue 20 credit COGS 40 debit Inventory 40 credit Kim and Kelley take no salary but they paid Francis 400 for maintenance work Wage expense 400 debit Cash 400 credit They pay 300 to advertise online for October and November cash 300 credit prepaid ad 150 debit advertising expense 150 credit they pay 2000 in rent rent expense 2000 debit cash 2000 credit Reminder Net income enters the balance sheet via retained earnings This process is called closing out For now increase or decrease retained earnings by the amount of net income O9302014 Chapter 4 O9302014 Do the yoga exercises Learning objectives Importance of accruals Understand the implications of deferrals and adjustments Learn how to record adjustments Construct financial statements Accruals In some cases cash changes hands In others transactions can be recorded without changing hands On account accruals are used to allow firms to recognize transactions when they happen rather than when cash changes hands this is critical for properly constructing the income statement which is meant to report economic activities in the period when they happen example a customer wants to purchase a new bike from Phinneywood on account Accts Receivable DEBIT Sales Rev CREDIT LATER Cash DEBIT O9302014 Accts Receivable CREDIT This works the same way if the company is receiving a good or service and paying later Key insight the economic activity has occurred but cash has yet to change hands Two stages Economic activity takes place recognize on income statement record receivable or payable Cash changes hands no income statement effect reverse receivable or payable I refer to these as opening and closing transactions Deferrals For some activities receipt or payment of cash precedes the economic activity This can include receiving cash before providing a good or service Ex Magazine subscription Or paying cash before receiving a good or service afterwards Ex Prepaid advertising We use the term deferral for such instances For these the thing that is deferred is recognition on the income statement Unlike accruals where the closing transaction is conspicuous ex Cash changing hands deferrals require adjustments after the opening transactions Ex Phinneywood bikes pays 300 to advertise online covering October and November The amount for October is recorded as a period expense Advertising expense 150 09302014 Cash 150 The remainder is classified as prepaid advertising Prepaid advertising 150 Cash 150 Will show up on balance sheet Record the advertising expense as an adjustment in November Advertising Expense 150 Prepaid advertising 150 Key insight cash has changed hands but the economic activity has yet to occur Two stages Cash changes hands no income statement effect record prepaid expenseunearned revenue Economic activity takes place recognize on income statement reverse prepaid or unearned Accruals usually have a single closing entry Paying a bill Deferrals often have multiple closing entries Prepaying several months of some expense IMPORTANT there is no trigger for recognition with a deferral You as the accountant must know and keep track Adjustments Other adjustments to keep an eye out for Depreciation property plant equipment Interest expense loans bonds Interest income fixed income investments Income tax Acquiring a piece of equipment Equipment xx Cash xx No effect on the income statement Recognize depreciation periodically over the life of the property Depreciation expense xx Accumulated depreciation xx on the balance sheet equipment gross xx accumulated depreciation xx equipment net yy when a firm borrows money the lender requires compensation initial borrowing cash xx loan payable xx nothing on income statement recognize interest periodically over the life of the borrowing interest expense xx interest payable xx O9302014 O9302014 interest income works the same way tax is calculated and accrued after you calculated pretax income taxes are generally due some period following the period when they are effective income tax expense xx income tax payable xx general steps for dealing with adjustments are there prepaid expense or unearned revenues on the balance sheet Should any of these be recognized Are there long term assets ex PPampE on the balance sheet Has the firm borrowed money Does the firm have interest bearing investments Did the firm earn positive net income on which they will owe taxes Property improvements expected to last 6 years 100006 years x 12 months 13888 Depreciation Expense 139 Accumulated Depreciation 139 Interest on SBA loan is payable at maturity and calculated as simple interest 10000 6 112 50month interest expense 50 interest payable 50 Record adjustments for October Depreciation expense 139 O9302014 Accumulated depreciation 139 Balance sheet accounts are permanent They are cumulative and their balances carry from one period to the next This is why our t accounts for balance sheet items must have a beginning balance Income statement accounts are temporary The income statement reports economic activities for some specific period of time Hence clean t accounts are at the start of each period Closing out We want increase or decrease retained earnings by the amount of net income or net loss When you close out we want a zero balance for each of these accounts Book this as a single adjusting entry to zero out all income statement accounts Debit all credit accounts Credit all debit accounts Offset to retained earnings Journal entries to close temporary accounts are the only time you directly credit or debit retained earnings Dividends is also a temporary account and must be closed out in the same fashion Revenue Recognition 09302014 What we refer to as revenue recognition when it gets recorded on the income statement The SEC sets the following criteria to determine when revenue can be recognized accrual basis Delivery has occurred or the service has been rendered Payment has been made or arranged The price is fixed or determinable Collection of cash is reasonably assured Should it be recognized Sale made and completed for cash Yes Sale is made and completed on account Yes Sale of goods is made in cash with a 10 chance of return Yes Sale for cash at 30 discount from original price Yes Cash received but service not yet provided No Sale of a gift card completed in cash No Contract is signed but no cash has changed hands Nah nigga don t record that fuckboi shit O9302014 Contract is signed first payment is received No Expense Matching Expense must be matched to revenues Determine expense associated with earning revenue Since revenues are reported in the period they are earned matching allows the income statement to report profit FUCK Ex inventory acquisition Don t recognize the expense until inventory is SOLD COGS xx Inventory Ex fixed asset acquisition PPampExx Cash payable xxx UNDER MATCHING WHEN SHOULD EXPENSE BE RECOGNIZED Depreciation Expense xxx Accumulated Depreciation xxx Chapter 5 Players 09302014 The objective of financial reporting is to proceed useful information for people outside the firm Investors Creditors Supplierscustomers Government There are many players in the financial reporting process they work to ensure the integrity of financial reports The firm The firms board of directors External auditors Regulars The firm itself is responsible for providing the financial reports the accounting staff prepares the financial statements the accounting manager is responsible for the reports the chief executive officer is responsible for all aspects of the business including accounting the CEO is ultimately responsible for all aspects of the firm including accoun ng Some firms will have an internal audit group that test the work of the accounting group Often reports to a controller who reports to CFO The internal audit group verifies the accuracy of the financial reports with reference to GAAP and ensure the firm has sufficient internal controls The board of directors of a firm is a group of individuals who represent shareholders interests Elected by shareholders Oversee various aspects of he firm includes monitoring management and long term firm direction The audit committee oversees he financial reporting process O9302014 Every publicly traded firm must have its financial statements evaluated by an external auditor The external auditor provides an independent assessment of whether the statements conform to GAAP rules The annual SEC filing 10k includes an opinion letter from the auditor The auditor assumes some liability for the reports Regulators provides standards for various steps in the process The FASB makes the GAAP rules The SEC enforces those rules The Public Company Accounting Oversight Board PCAOB sets rules for external auditing The SarbanesOxley Act of 2002 requires the CEO and CFO to certify financial statements Fraud The many links in the financial reporting chain are designed to prevent intentional misstatement of financial what we call fraud The necessary conditions for fraud are referred to as the Fraud Triangle lncen ve Opportunity Rationalization O9302014 Chapter 6 lncen ves The first unit focused on the mechanics of accounting Firms try to always report honestly and try to convey the underlying economic condition of the firm Bonus plan There are a variety of reasons firms want to increase net income One is the managerial bonus which is often linked to net income Within certain ranges the managers bonus is a linear function of net income This is meant to motivate managers to work hard pay for performance there are also incentives to decrease reported income Net Sales Companies use various methods to motivate sales from consumers Allow the use of credit cards Offer sales discounts Allow returns O9302014 Firm must weigh cost and benefits of these options Credit Cards Allow customers to make purchases now but pay later The card is issued through a bank affiliated with a credit card brand The bank extends the credit and collects payments charges the interest etc This is different from a store card where the company issues its own card The credit card company charges a fee for the service they provide What s a normal fee 23 o example PhinneyWood bikes sells a bike to a customer for 1100 The customer pays with a credit card with a 3 fee CC Receivable 1067 CC Discount 33 contra revenue Sales Rev 1100 Cash 1067 CC Receivable 1067 Income statement reporting Sales revenue 1100 O9302014 Less CC discount 33 Net Sales 1067 Sales Discount The longer the wait for the cash the worse it is for the seller Risk of nonrepayment Interest forgone The seller may offer inducements to encourage quick repayment of cash Ex PhinneyWood sells some gear fro 1300 on account Acct Rec 1300 Rev 1300 The receivable terms are 210 n30 Pay within 10 days 2 percent discount Have to pay total amount within 30 days If the customer makes the payment in time Cash 1274 Sales Acct 26 Acct Rec 1300 09302014 If the payment is too late Cash 1300 Acct Rec 1300 Note that the discount is condition on when the payment of cash takes place This is different from a trade discount which is an unconditional markdown of the sales price Recorded as a regular sale Thus the discount is recognized when the sale is recorded Income statement reporting Sales revenue 1300 Less Sales discount 26 Net sales 1274 Returns Sellers can use return policies to encourage sales 900 in inventory is returned Sales returns 900 Cash 900 Inventory 900 COGS 900 O9302014 Net Receivables Recall the SEC s four requirements for revenue recognition Delivery has occurred or the service has been rendered Payment has been made or arranged The price is fixed or determinable Collection of cash is reasonably assured The losses associated with accounts not being collected are called bad debt expense Following expense matching we record the bad debt expense when the sale is recorded Bad Debt Expense 1 Record credit sales for the period 2 Record adjustment for bad debt expense 3 Future write off bad debts 4 Deeper in the future Add back any recoveries FINISH VIEWING SLIDES ONLINE 1023 O9302014 Chapter 7 Calculate bad debt expense using percentage of credit sales 2 and aging of accounts receivable methods Over the course of the year you sell 153 food dehydrators 12959 and 87 juicers 15969 to customers One third of sales are for cash two thirds on credit cards 24 fee Sales Returns contra rev Store Credit unearned rev Inventory COGS lncen ves Income taxes are levied against the pretax income of the firm Lower pretax income results in lower taxes other things held equal Firms will therefor try to lower pretax income using noncash expenses Examples of noncash expenses Depreciation Bad Debt Expense COGS Income taxes provide the borrower incentive to decrease reported tax income Much of our interest in inventory cost flow calculations are driven by this tax avoidance incen ve 09302014 What gets reported for cost of goods sold Purchase of inventory Inventory xx Cashpayable xx Inventory Sale COGS xx Inventory xx Inventory is capitalized on acquisition Rather than immediately recognizing the cost as expense it is deferred until the inventory sale Why Expense matching look up Definition inventory is tangible property held for sale in the normal course of business or component parts of items eventually for sale Merchandise inventory are finished goods acquired to sell by a wholesaler or retailer Manufacturers have several types of inventory Raw materials Work in process Unfinished but due to be completed Finished goods O9302014 Inventory is generally carried at acquisition cost What is recorded on the balance sheet is historical cost Ex a company receives 100 units of inventory for 5 ea with 12 chipping cost Inventory 500 512 Cashpayable 500 512 Additional costs associated with a acquisition re included with the cost We call these capitalized costs These include purchases freight in manufacturing and packaging Sales discounts lower the value of the inventory Ex a company acquires 100 units of inventory at 5 each payable on account with terms 210 n30 Inventory 500 Payable 500 make the window Acct Payable Cash 490 Inventory 10 The carrying value of inventory is 490 Does not show how much it is worth only shows the cost to acquire Since finished inventory is purchase ready to sell the firm does not affect the value between acquisition and sale The same is not true of manufacturing where the firm adds value before sale Labor costs O9302014 Factory overhead costs These costs are capitalized into the ending cost of inventory Inventory Costing Methods There are four methods allowable under US GAAP Specific identification Average cost First in first out FIFO Last in first out LIFO In some cases it is possible to identify the specific item being sold and measure the cost associated with tat specific item Under specific identification the cost is associated with the actual piece of inventory sold Under the remaining three methods the recognition of cost is not based on the physical movement of inventory ie different costs can be recognized even though COMPLETE Inventory Costing Systems When multiple purchase and sale transactions take place during a period the inventory costing system dictates how cost of goods sold is tracked and calculated With perpetual inventory cost is tracked in real time and recorded with the sale With periodic inventory cost is not tracked in real time and must be recorded as an adjustment at period end Perpetual LIFO Ex sale of 110 5unit on 1010 Cash 55 Sales rev 55 COGS xx Inventory xx Ex Purchase of 70 45unit on 1016 Inventory 315 Cash 315 Ex Sale of 50 54 unit on 1018 Cash 27 Sales Rev 27 COGS 225 Inventory 225 Periodic LIFO Ex Purchase on 1016 Inventory 315 Cash 315 MampT Do this tonight couple hours O9302014 O9302014 LIFO Liquidation During inflationary periods LIFO generally leads to higher COGS with lower pretax income and taxes However if inventory levels fall too low the effect can reverse Normally LIFO provides higher cost of goods sold and lower net income Recognizing cost from old cheap LIFO lots is called LIFO Liquidation Firms can prevent LIFO liquidation by purchasing newer inventory to prevent them from dipping into previously purchased cheaper lots When a firm reports LIFO GAAP requires a disclosure in the footnotes reconciling to the FIFO inventory value Inventory FIFO 1270 Less LIFO Reserve 730 Inventory LIFO 540 The difference in net income must also be recorded The LIFO reserve can be viewed as the amount the firm can increase net income if they take a LIFO Liquidation Inventory Valuation Inventory is valued on the balance sheet using the Lower Cost or Market LCM rule If the price of inventory is increasing the historical cost is reported on the balance sheet If the price of inventory falls the value on the balance sheet must be changed to reflect this decline Ex PhinneyWood bikes holds 20 Shimano gearsets originally purchased at 40 each The cost of the inventory falls to 37 09302014 37 40 20 60 decline in value COGS 60 Inventory 60 The cost of inventory increases to 42 No adjustment is made Conservative accounting Chapter 8 Acquisition Unlike inventory which is purchased to be sold or manufactured fixed assets are purchased to facilitate the firm s operations or productive capacity These assets are tangible Three categories of fixed assets Land used for operation Buildings fixtures and equipment Natural resources Land and building fixtures and equipment are often called Property Plant amp Equipment PPampE Fixed assets are capitalized rather than immediately expense on acquisition Why are fixed assets capitalized rather than expensed Tank your net income Expense matching 09302014 In addition to the cost of the asset itself any related costs are also capitalized These include any costs required to acquire or prepare the asset for use Freight installation taxes fees This is similar for land but there are even more costs that can be capitalized Closing costs prep fees clearing razing draining filling assumption of taxes iens mortgages and other permanent improvementsex Infrastructure improvements Ex a firm purchases equipment at a cost of 1K Equipment 1K Cash etc 1K Payment can be in cash payable equity Ex a firm purchases equipment at a cost of 1K they also pay 40 to freight in and 60 for installation Equipment 1100 Cash etc 1K discounts reduce the capitalized value after acquisition other costs may be incurred to keep the asset working properly improvements expenditures that increase the productive life operating efficiency or productive capacity of the asset maintenance expenditures that maintain the productive life operating efficiency improvements are capitalized to the asset value equipment 100 cash etc 100 maintenance expenditures are expensed immediately maintenance expense 50 O9302014 cash etc 50 Depreciation An economic sense is the decline in value of an asset over time The accounting concept of depreciation is different Unrelated to value in the economic sense Represents the allocation of the acquisition cost of a fixed asset to expense Reporting of fixed assets Equipment gross xxx Less Acc Depreciation yyy Equipment Net zzz Depreciation calculations require Estimate of assets useful life Assets salvage value There are different cost allocation methods allowable under GAAP Useful Life The amount of time the firm expects the asset to be in service A lot of variation Useful life begins when acquired and put into service 09302014 It may last until physical obsolescence when the asset can no longer serve the purpose for which it was acquired Useful life may be cut short by technical obsolescence where a fixed asset is rendered obsolete by technological advances Example Blasko acquires a piece of equipment costing 10000 The estimated useful life is 10 years Yr 1 Depreciation expense 1000 Acc Depreciation 1000 Equipment gross 10000 Less Acc Dep 1000 Equipment net 9000 The useful life estimate can be changed while the firm holds the asset Ex after the beginning of year 3 the asset s remaining useful life is revised to be only five more years The remaining net value is allocated over the revised years There is no correction to prior depreciation entries Adjustments to useful life are treated prospectively or going forward Useful life is an estimate and changing an estimate is not considered an error Land held for operations is considered to be infinitely lived so no depreciation recognized What are the implications for capitalized costs O9302014 Salvage Value 09302014 How much an asset is expected to be worth at the end of its useful life The implication is that there may be some value for the asset once its useful life ends To sell or trade As scrap In accounting the salvage value indicates the net value of the asset down to which depreciation is recognized Fixed assets are not depreciated below their salvage value The depreciation base is the total amount of depreciation that will be recognized over the life of the asset Acquisition cost salvage value depreciation base Ex Blasko acquires equipment for 50K with an 8 year estimated useful life and salvage value of 10K 5K yearly depreciation depreciation expense 5k Acc Dep 5k Like useful life the estimated salvage value can be changed The effect of any change is dealt with prospectively again like useful life Ex 50K equipment 8 yr life 10K salvage After 3 yrs the net value is Equipment gross 50K Less Acc Dep 15K O9302014 Salvage Value 10K The salvage value is increased to 13K The depreciable base decreased to 22K Depreciation Methods We will study three depreciation methods Straight line Declining balance Units of production Straight line depreciation allocates the depreciation base evenly over the useful life of the asset Rationales of use Benefit of the asset is even over its useful life so the expense should be also Simple to calculate Results in high net income Declining Balance is a method that recognizes depreciation at an accelerated rate Relative to straight line Rationales for use The benefits of an asset are greater early in its useful life More realistically reflects the deterioration in asset productive value Results in lower taxes O9302014 Note regardless of the method of depreciation chosen the aggregate depreciation recognized over the life of the asset must be the same Different methods will change when the depreciation is recognition is changed but not how much The double declining balance formula 2 x Net Book Value N Net Book Value Cost Acc Dep N Useful Life Note declining balance ignores salvage value at first Ex 100K cost 5 yrs no salvage value 2 x 100K5 40K Dep Expense 40K Acc Dep 40K PPE gross 100K Less Acc Dep 40K PPE Net 60K Yr 2 2 x 60K5 24K PPE gross 100K Less Acc Dep 64K O9302014 PPE Net 36K In the final year of useful life recognize the remainder of the cost Ex same case 20K salvage value Yrs 1 2 and 3 are the same Total dep Over 3 yrs 784K Total depreciable amount 80K Remaining depreciable amount 16K On the year that you break the salvage value only depreciate amount that would set you even to the salvage value No more depreciation in following years Units of Production Straight line and ending balance are arbitrary cost allocation methods No effort is made to track the actual productive use of the asset being depreciated When the revenue from a production can be practically estimated the units of production method of depreciation can be used Instead of estimating the useful life a time based measure the manager would estimate the total production based on the total use of the asset Ex Blasko buys machine for 450K estimated 20K cycles before being worn out when it will have a salvage value of 50K In yr 1 the machine runs 2500 operation cycles 25K x 20 50K Dep Expense 50K Acc Dep 50K Impairment O9302014 Given the long life of fixed assets the firms must periodically review these to determine if a future benefit can actually be expected If the expected future has declined over time the asset must be impaired Definitions Future cash flows estimated cash flows associated that the asset will generate over the remainder of its useful life Fair value the estimated mark value value to sell Steps Test if the net book value gt future expected cash flows the asset must be impaired Loss calculate the impairment loss as net book value fair value Ex impairment loss xx whatever asset xx Disposal Fixed assets are removed from the balance sheet in several cases The asset is sold The asset is exchanged The asset is taken out of service due to obsolescence The asset is taken out of service due to casualty Regardless of the reason an asset is taken out of service the net book value must be removed from the balance sheet when the disposal takes place Assets can be disposed of with value received in return return exchange Can be disposed of with no value received in return Ex Blasko retires a fully depreciated piece of equipment OG cost 15K Acc Dep 15K O9302014 Equipment 15K Ex Blasko retires a piece of equipment with 0G cost of 15K after 13 yrs The useful life is 15K Acc Dep 13K Loss on retirement 2K Equipment 15K Retired assets no cashvalue received can only generate losses When value is received on disposal the gain or loss is determined by the net book value FUCK Ex Blasko sells a piece of full depreciated equipment for 2K OG cost 15K Cash 2K Gain on equipment sale 2K Acc Dep 15K Equipment 15K Ex Blasko sellse a piece of equipment for 2K NBV 3K OG cost 15K Cash 2K Loss on equipment sale 1K Acc Dep 12K Equipment 15K Intangibles Intangible assets are things that provide probably future economic benefit to the firm but have no physical manifestation Copyrights last for the life of the creator 70 yrs and are linked to creative endeavors Patents are linked to inventions and last 20 yrs O9302014 Trademarks last 10 yrs are renewable and are associated with products or companies Intangibles that are purchased by the firm are reported on the balance sheet at historical cost Internally developed intangibles ex Research and development are expensed as incurred and not reported on the balance sheet Intangibles with a definite life are amortized on a straight line basis over that life Amortization expense xx Intangible asset xx Intangibles with an indefinite life are not amortized but tested periodically for impairment Goodwill Goodwill is an intangible asset that is recognized when one firm acquires another firm If the purchase price is higher than the fair value of the acquired company the difference is reported as goodwill Goodwill used to be amortized but is now only subject to impairment testing
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