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Flashcards

Intermediate Accounting, Ch 11 Terms

luzser1800 Accounting Intermediate English 59 cards

Cards in this deck (59)

  1. 1DepreciationThe accounting process of allocating cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.
  2. 2DepletionThe reduction in the cost of natural resources (such as timber, gravel, oil, or coal) over a period of time.
  3. 3AmortizationThe expiration of intangible assets, such as patents or copyrights.
  4. 4What questions should be asked to determine a depreciation process?1-What depreciable base is to be used for the asset?
    2-What is the asset's useful life?
    3-What method of cost apportionment is best for this asset?
  5. 5What is the depreciable base?The base considers the original cost less the salvage or disposal value.
  6. 6Salvage ValueThe estimated amount that a company will receive when it sells the asset or removes it from service.
  7. 7How does the service life compare to the physical life of an asset?The service life is often different than the physical life.
  8. 8What are the reasons to retire an asset?Physical factors
    Economic factors
  9. 9What are physical factors?Wear and tear, decay, and casualties that make it difficult for the asset to perform indefinitely. This is used to set the outside limits for the service life of an asset.
  10. 10What are economic factors?Obsolescence
  11. 11What are the 3 categories that economic and functional factors can fall into?Inadequacy
    Supersession
    Obsolescence
  12. 12InadequacyOccurs when an asset ceases to be useful to a company because the demands of the firm have changed.
  13. 13SupersessionThe replacement of one asset with another more efficient and economical asset.
  14. 14ObsolescenceThe catchall for situations not involving inadequacy and supersession.
  15. 15What are the different methods for depreciation?Activity method
    Straight-line method
    Decreasing charge methods
    Special depreciation methods
  16. 16What other names can the activity method of depreciation go by?Variable Charge
    Units-of-production approach
  17. 17Activity MethodAssumes that depreciation is a function of use or productivity, instead of the passage of time. Considers the life of the asset in terms or output it provides or input measure such as the number of hours it works.
  18. 18What is a major limitation of the activity method of depreciation?Inappropriate in situations in which depreciation is a function of time instead of activity.
  19. 19Straight Line MethodConsiders depreciation a function of time rather than a function of usage.
  20. 20What is a major objection to the straight line method?The objection is that it rests on two tenuous assumptions:1-The assets economic usefulness is the same each year 2-The repair and maintenance expense is essentially the same each period.
  21. 21Decreasing Charge MethodsProvide for a higher depreciation cost in the earlier year and lower charges in the later periods. Also called accelerated depreciation methods.
  22. 22What is the main reason for using an accelerated depreciation method?The main reason for using an accelerate depreciation method is that companies should charge more depreciation in earlier years because the asset is most productive in earlier years.
  23. 23The Sum-of-the-Years Digits MethodMethod that results in a decreasing depreciation charge based on decreasing fraction of depreciable cost.
  24. 24Declining Balance MethodUses a depreciation rate that is some multiple of the straight line method..ie. double declining
    Does not deduct the salvage value in computing depreciation base.
  25. 25What are the two special depreciation methods?1-Group and composite methods
    2-Hybrid or combination methods
  26. 26What is the group method for depreciation?Used when companies have assets that are similar in nature and have approximately the same useful lives.
  27. 27What is the composite approach for depreciation?Used for groups of assets when they are dissimilar and have different lives.
  28. 28How is the composite depreciation rate determined?Determined by dividing the depreciation per year by the total cost of the assets.
  29. 29Composite LifeThe length of time that is takes a company to depreciate assets on a composite basis.
  30. 30What are the advantages of depreciating by the unit method instead of the composite method?1-Simplifies computation
    2-Identifies gains and losses on disposal
    3-Isolates depreciation on equipment
    4-Gives best estimate of the depreciation of each asset
  31. 31What does GAAP require for depreciation method?GAAP requires only that the method result in the allocation of an assets cost over the assets life in a systematic and rational manner.
  32. 32How does depreciation differ from other expenses?Depreciation does not involve a current cash outflow.
  33. 33How should a change in estimate to useful life be handled?The company should change the estimate in the current and prospective periods. They should not make any changes to previously reported periods.
  34. 34Does Lower of cost or market apply to PPE?Lower of cost or market does not apply to PPE
  35. 35What is impairment?Write offs of long lived assets
  36. 36What events might lead to impairment?1-Significant change in fair value of assets
    2-Siginficant change in the extent or manner in which asset is used.
    3-Significant adverse change in legal factors or business climate
    4-Accumulation of costs significantly in excess of amount originally expected.
    5-A projection demonstrates continuing losses associated with an asset
  37. 37What is a recoverability test?Test used to determine if an asset is impaired.
  38. 38What are the steps to recoverability test?1-Estimate the net future cash flows expected from the use of that asset and its eventual disposition.
    2-If the sum of the expected future net cash flows is less than the carrying amount of the asset, it is considered impaired.
  39. 39What is the impairment loss?The impairment loss is the amount by which the carrying amount of the asset exceeds its fair value. If there is no active market the present value of expected future net cash flows used to determine fair value.
  40. 40How is the impairment loss reported on the income statement?The impairment loss should be reported under other expense and loss section on the income statement and should not be considered extraordinary.
  41. 41What is the new cost basis of an asset after recording an impairment loss ?The new cost basis is the reduced carry amount.
  42. 42Can an impairment loss be restored in an asset held for use?An impaired asset held for use cannot be restored.
  43. 43How should assets held for disposal be treated?Assets held for disposal are like inventory and should be reported at the lower of cost or net realizable value. Thus, they can write up or write down assets held for disposal as long as the carry value never exceeds the original carry value before impairment.
  44. 44Natural ResourcesWasting assets, include petroleum, minerals, and timber.
  45. 45What are two main features of natural resources?The complete removal (consumption) of the asset
    Replacement of the asset only by an act of nature
  46. 46What is included in computation of the depletion base?Acquisition costs
    Exploration costs
    Development costs
    Restoration costs
  47. 47Acquisition costsThe price that is paid to obtain the property rights to search and find an undiscovered natural resources or to purchase already discovered.
  48. 48Exploration costsCosts needed to find the resources, most larger companies expense these costs, smaller companies capitalize.
  49. 49Development costsTwo sections-tangible equipment costs and intangible development costs
  50. 50Tangible equipment costsTransportation and other heavy equipment needed to extract the resources and get it ready for market.
    Not included in depletion base
  51. 51Intangible development costsInclude items such as drilling costs, tunnels, shafts.
    Considered part of depletion base.
  52. 52Restoration costsCosts incurred to restore property to its natural state after extraction.
  53. 53How is depletion typically computed?Units of production
  54. 54Liquidating dividendsDividends greater than the amount of accumulated net income.
  55. 55Full cost conceptThe cost of exploration if not successful is a necessary expense to find successful locations.
  56. 56Successful Efforts ConceptBelieves that only costs directly related to a project should be applied to a project, other non successful efforts should be reported as period charges.
  57. 57Asset turnover ratioRatio divides net sales by average total assets for the period
  58. 58Profit margin on sales ratioNet income divided by net sales
  59. 59Rate of return on assetsDivide net income by average total assets

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Intermediate Accounting Flashcards on Intermediate Accounting, Ch 11 Terms, created by luzser1800 on 11/02/2016.
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