sm_ch08 - CHAPTER 8 8-1 Tangible assets are those that can...

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Unformatted text preview: CHAPTER 8 8-1 Tangible assets are those that can be seen and touched. Intangible assets are those rights or economic benefits that are not physical in nature. 8-2 All three terms refer to an allocation of costs over time. Reduction of intangible assets is generally called amortization. Depreciation is a reduction in buildings and equipment and other tangible assets . Depletion is a reduction in natural resources. 8-3 Cash discounts are reductions in original cost, not income. 8-4 When an expenditure is capitalized, it is not credited to stockholders' equity. Rather, it becomes an asset with a useful life in excess of one year. Technically a A n asset is debited and generally either cash or a liability is credited. 8-5 Accumulated depreciation is not cash; if specific cash is being accumulated for the replacement of assets, such cash will be an asset specifically labeled as a "cash fund for replacement and expansion" or a "fund of marketable securities for replacement and expansion." Accumulated depreciation is the cumulative amount of an assets depreciable value that has been expensed. 8-6 Valuation implies some measure of present market value. In contrast, depreciation is the systematic allocation of the original cost of the asset to as an expense on the income statement over the useful life of the asset. s useful life. Chapter 8 Long-Lived Assets and Depreciation 115 8-7 Depreciation is a method of cost allocation , not valuation. It simply allocates the cost of an asset to the periods that benefit from its use. 116 8-8 No. Keeping two sets of books is necessary if two separate purposes are being legally fulfilled. In many cases two sets of books are required , sometimes more than two. Requirements include external financial reporting, internal managerial needs and tax reporting. 8-9 Both choices are between initially greater current income and asset values (straight-line and FIFO) versus initially smaller current income and asset values (accelerated and LIFO). This statement assumes rising price levels for inventory items. They The choices differ because the FIFO-LIFO choice affects cash flows via its tax consequences. The Why? Because the IRS requires all firms using LIFO for tax purposes to use it for financial reporting purposes as well. On the other hand the accelerated versus straight-line choice does not affect cash flow because a firm is not required to use the same depreciation method for tax reporting and financial reporting. does not have to change its depreciation method used for tax reporting because of this choice for financial reporting. 8-10 No. Depreciation, by itself, generates no cash. 8-11 Accelerated depreciation used for tax purposes usually leads to higher depreciation expense early in an assets life and hence lower pretax income. Because pretax income is lower, taxes are lower. Depreciation does not affect cash, but taxes do....
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sm_ch08 - CHAPTER 8 8-1 Tangible assets are those that can...

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