Chapter 8 Notes
I. DEFINE, CLASSIFY, AND EXPLAIN THE NATURE OF LONG-LIVED
PRODUCTIVE ASSETS AND INTERPRET THE FIXED ASSET TURNOVER
A. Classifying Long-Lived Assets
are resources that determine a company’s productive capacity.
have physical substance. They are usually classified as property, plant, and
equipment (fixed assets). They include:
Land used in operations.
Buildings, fixtures, and equipment used in operations.
Natural resources used in operations.
have no physical substance. These assets confer rights on the owner. They
are evidenced by legal documents.
Examples include patents, copyrights, franchises, licenses, and trademarks.
Fixed Asset Turnover
How effectively is management using fixed assets to generate revenue?
For each dollar of fixed assets, how many dollars of sales revenue are generated?
APPLY THE COST PRINCIPLE
TO MEASURE THE ACQUISITION AND
MAINTENANCE OF PROPERTY, PLANT, AND EQUIPMENT.
A. Measuring and Recording Acquisition Cost
Under the cost principle, all reasonable and necessary costs incurred to acquire, set up, and to
place an asset in service should be capitalized, i.e., assigned (recorded) to the asset account.
: the net cash equivalent amount paid or to be paid for long-lived assets.
Costs to buy the asset include the invoice price (less early payment discounts), sales
taxes, legal fees, and transportation costs.
Setup costs, including special wiring, platforms (such as a concrete foundations), and
other installation costs.
Costs to place the asset in service (to make usable) include expenditures for testing,
adjusting, renovating, and complying with safety requirements.
Generally, financing charges associated with the asset are treated as interest expense (not
Various acquisition methods to acquire long-lived assets include acquisitions:
cash is paid at the time of acquisition.
a note is negotiated with the seller or the bank to finance the purchase.
equity or noncash consideration
: when stock or other noncash consideration is