review09 - CHAPTER 9 Long-Term Assets 0REVIEWING THE...

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CHAPTER 9 Long-Term Assets 0REVIEWING THE CHAPTER Objective 1: Define long-term assets, and explain the management issues related to them. 10. Long-term assets (once called fixed assets ) are assets that (a) have a useful life of more than one year, (b) are acquired for use in the operation of a business, and (c) are not intended for resale to customers. Assets that are not being used in the normal course of business, such as land held for speculative purposes, should be classified as long-term investments rather than as long-term assets. 20. Property, plant, and equipment is the balance sheet classification for tangible assets, which are long-term assets that have physical substance, and for natural resources, which are long-term assets in the form of valuable substances, such as standing timber, oil and gas fields, and mineral deposits . Intangible assets is the balance sheet classification for long- term assets without physical substance whose value is based on rights or advantages accruing to the owners; examples are patents, copyrights, trademarks, franchises, licenses, and goodwill. The allocation of costs to different accounting periods is called depreciation in the case of plant and equipment (plant assets), depletion in the case of natural resources, and amortization in the case of intangible assets. Because land has an unlimited useful life, its cost is not converted into an expense. 30. Long-term assets are generally reported at carrying value (also called book value ), which is the unexpired part of a plant asset’s cost. Carrying value is calculated by deducting accumulated depreciation from original cost. If asset impairment (loss of revenue- generating potential) occurs, the long-term asset’s carrying value is reduced to reflect its current fair value (an application of conservatism). A loss for the amount of the write-down would also be recorded. Taking a large write-down in a bad year is often called “taking a bath,” because it presumably will reduce future depreciation or amortization and, thus, raise the likelihood of profit realization. 40. Capital budgeting is the process of evaluating a decision to acquire a long-term asset. One common capital budgeting technique compares the amount and timing of cash inflows and outflows over the life of the asset under consideration. If the net present value of those cash flows is positive, the asset should probably be purchased. Information about long-term asset acquisitions may be found in the investing activities section of the statement of cash flows. 50. Long-term assets not purchased for cash must be financed. Common financing techniques include issuing stock, bonds, and long-term notes. Free cash flow is a good measure of a business’s ability to finance long-term assets. Specifically, it is the amount of cash that remains after deducting the funds a company must commit to continue operating at its planned level, and is computed as follows: Free Cash Flow = Net Cash Flows from Operating Activities – Dividends – (Purchases of Plant Assets – Sales of Plant Assets)
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60. The major problem in accounting for long-term assets is to figure out how much of the asset
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review09 - CHAPTER 9 Long-Term Assets 0REVIEWING THE...

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