Chapter 8 Notes

Chapter 8 Notes - 1 Chapter 8 Notes I. DEFINE, CLASSIFY,...

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Chapter 8 Notes I. DEFINE, CLASSIFY, AND EXPLAIN THE NATURE OF LONG-LIVED PRODUCTIVE ASSETS AND INTERPRET THE FIXED ASSET TURNOVER RATIO. A. Classifying Long-Lived Assets Long-Lived Assets are resources that determine a company’s productive capacity. 1. Tangible assets have physical substance. They are usually classified as property, plant, and equipment (fixed assets). They include: a. Land used in operations. b. Buildings, fixtures, and equipment used in operations. c. Natural resources used in operations. 2. Intangible assets have no physical substance. These assets confer rights on the owner. They are evidenced by legal documents. a. Examples include patents, copyrights, franchises, licenses, and trademarks. 3. Fixed Asset Turnover a. How effectively is management using fixed assets to generate revenue? b. For each dollar of fixed assets, how many dollars of sales revenue are generated? Assets Fixed Net Average Revenues) Operating (or Sales Net Turnover Asset Fixed = 2 Assets Fixed Net Ending - Assets Fixed Net Beginning Assets Fixed Net Average = II. APPLY THE COST PRINCIPLE TO MEASURE THE ACQUISITION AND MAINTENANCE OF PROPERTY, PLANT, AND EQUIPMENT. A. Measuring and Recording Acquisition Cost 1. 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. a. Acquisition costs : the net cash equivalent amount paid or to be paid for long-lived assets. Examples: 1. Costs to buy the asset include the invoice price (less early payment discounts), sales taxes, legal fees, and transportation costs. 2. Setup costs, including special wiring, platforms (such as a concrete foundations), and other installation costs. 3. Costs to place the asset in service (to make usable) include expenditures for testing, adjusting, renovating, and complying with safety requirements. b. Generally, financing charges associated with the asset are treated as interest expense (not capitalized). 2. Various acquisition methods to acquire long-lived assets include acquisitions: a. For cash: cash is paid at the time of acquisition. b. For debt: a note is negotiated with the seller or the bank to finance the purchase. c. For equity or noncash consideration : when stock or other noncash consideration is 1
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included as part of the purchase price. 1. The cash-equivalent cost is measured by the current market value of the stock or noncash consideration given up. 2. If the value of what is given up is not determinable, the current market value of what is received should be used for measurement purposes. d. By construction: self-constructed assets should include all necessary costs associated with construction such as labor and materials. 1.
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Chapter 8 Notes - 1 Chapter 8 Notes I. DEFINE, CLASSIFY,...

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