AC 101 Fall 2007 Ch 9

AC 101 Fall 2007 Ch 9 - Valuing Long-Lived Assets Chapter...

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Unformatted text preview: Valuing Long-Lived Assets Chapter Nine Prepared by: Sarita Sheth Santa Monica College Chapter Nine Objectives 1. Determine whether expenditures should be capitalized as assets or expensed. 2. Understand the process of depreciation and amortization for allocating costs; as firms realize the benefits of using up assets. 3. Identify the economic incentives and consequences of alternative accounting treatments for long-term assets. 4. Understand the accounting treatments of certain intangible assets. Capital Expenditures Capital expenditures are outlays for long-lived assets that are placed on the balance sheet. Depreciation/Amortization is an estimate for the use of the capital asset in a period. Capitalization Criteria General rule: firms should capitalize (put on balance sheet) all costs required to purchase the asset and prepare it for use: Cash or other assets given up to acquire the asset. Installation costs Transportation costs Legal costs Taxes Interest cost (for self-constructed assets) Improvements and Repairs If a cost substantially adds value to the asset it should be capitalized. If a cost is incurred to maintain the asset in its current condition, it should be expensed. Depreciation Long-lived assets are supposed to help generate revenue for multiple periods. To adhere to the matching principle the firm must allocate the long-lived assets cost for the revenue that the asset produced....
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AC 101 Fall 2007 Ch 9 - Valuing Long-Lived Assets Chapter...

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