PDF_PP_Slides_07_(APSCW_-_F2009)

PDF_PP_Slides_07_(APSCW_-_F2009) - Handout07 ,Inc ABC,Inc....

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1 Your brother says you should buy shares of ABC, Inc. ABC, Inc. has weathered the industry downturn better than other companies. Handout 07 2002 Q1 results show a 16% decline in sales & a 34% decline in profits, but other companies are reporting steeper sales & earnings declines. The shares look “incredibly cheap” at $2.00 because the company has a book value of $20.50/share and cash of $0.73/share. An article in this morning’s paper raises another point: Operating Expenses 42% Sales Fixed “rental” payment Holding steady despite declining sales (and ratio increases at other firms) Handout 07 In June 2002, WorldCom says $3.8 billion in line cost expenses were wrongly transferred to the balance sheet. Shares fall to $0.06. $11 billion of improper transfers are eventually uncovered. In July 2002, the company declares bankruptcy. $3.8 B ?!? FUTURE BENEFITS NO FUTURE BENEFITS ASSET EXPENSE
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2 Handout 07 “Show those numbers to the damn auditors and I’ll throw you out the @$&#!*% window” [Buddy Yates, then WCOM’s director of general accounting, to an employee asking for an explanation of a large accounting discrepancy.] Objectives: Handout 07 Determine when items should be capitalized as assets or recorded as expenses. Understand depreciation and amortization as a process of cost allocation, not valuation. Compute depreciation under different depreciation methods. Explain the accounting issues related to asset impairments and dispositions
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3 Long Lived Assets Long lived assets (LLA) are assets that are Handout 07, p. 1 Long lived assets (LLA) are assets that are expected to provide benefits over several accounting periods Four Categories: Investments Tangible Assets (PP&E) Intangible Assets Other Assets Tangible & Intangible Assets The matching principle requires that the cost of Handout 07, p. 2 LLAs be allocated to the periods that benefit from using them. Two basic accounting issues: How do we measure the cost of an asset? How do we allocate the cost to the periods that benefit from the asset?
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4 Tangible Assets How do we measure the cost of an asset? Handout 07, p. 3 Capitalize [include in book value (BV)] all costs necessary to obtain the asset and prepare it for its use: Purchase Price, Commissions and Fees, Taxes, Transportation, Insurance, Installation and Testing, Etc. For assets that require an acquisition period (e.g., construction of buildings), the cost includes interest on loans during construction that could have been avoided absent construction (“Avoidable Interest”). Class Question: Assets YYZ purchased a machine for $32,000 in cash (includes $1,500 in sales taxes). Dealer fees totaled $800 and are not included in 89% the purchase price. Transportation and installation amounted to $2,000 and were paid in cash.
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This note was uploaded on 02/27/2011 for the course BUSINESS 101 taught by Professor S during the Spring '10 term at Columbia College.

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PDF_PP_Slides_07_(APSCW_-_F2009) - Handout07 ,Inc ABC,Inc....

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