Accounting quiz3

Accounting quiz3 - LONG-LIVED ASSETS Long-lived assets: one...

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LONG-LIVED ASSETS Long-lived assets: one whose future benefit is expected for a number of years; also called long-term asset . It includes such noncurrent assets as building, equipment, and intangibles. Nature of Capitalization of: Defined Under the cost principle: long-term assets are recorded at historical cost and depreciated as the items age or the company uses up the value of the asset. This usage is recorded as depreciation on the accounting ledgers; original long-term asset values are netted against the total depreciation to determine the asset’s salvage value. Income statement effect of errors in: An incorrect inventory balance causes an error in the calculation of cost of goods sold and, therefore, an error in the calculation of gross profit and net income. Left unchanged, the error has the opposite effect on cost of goods sold, gross profit, and net income in the following accounting period because the first accounting period's ending inventory is the second period's beginning inventory. The total cost of goods sold, gross profit, and net income for the two periods will be correct, but the allocation of these amounts between periods will be incorrect. Since financial statement users depend upon accurate statements, care must be taken to ensure that the inventory balance at the end of each accounting period is correct. The chart below identifies the effect that an incorrect inventory balance has on the income statement. Land purchased with a building on it Types of: Tangible asset: Assets having a physical existence, such as cash, equipment, and real estate; accounts receivable are also usually considered tangible assets for accounting purposes. Opposite of intangible asset. Intangible asset: Something of value that cannot be physically touched, such as a brand, franchise, trademark, or patent. opposite of tangible asset. Intellectual property asset: Any intangible asset that consists of human knowledge and ideas. Some examples are patents, copyrights, trademarks and software. Most such assets cannot be recongized on a balance sheet when internally generated, since it is very difficult to objectively value intellectual property assets (slightly different rules apply in the case of software). They can, however, be included in a balance sheet if acquired, which allows a more accurate valuation for the asset (that is, the acquisition cost). Patent: The exclusive right, granted by the government, to make use of an invention or process for a specific period of time, usually 14 years. Copyright: The exclusive right to make and dispose of copies of a literary, musical, or artistic work. Franchise: A form of business organization in which a firm which already has a successful product or service (the franchisor) enters into a continuing contractual relationship with other businesses (franchisees) operating under the franchisor's trade name and usually with the franchisor's guidance, in exchange for a fee. Licensing right:
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Accounting quiz3 - LONG-LIVED ASSETS Long-lived assets: one...

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