Ch11 - Objectives Ch 11 Income Depreciation and Cash Flow...

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Ch 11 Income, Depreciation and Cash Flow Objectives Describe deterioration, depreciation and obsolescence Distinguish between various types of depreciable property and differentiate between depreciation expenses and other business expenses • Use historical depreciation methods to calculate annual depreciation charge and book value over an asset’s life Explain the differences between the historical depreciation methods and the capital cost allowance system (CCA) Objectives (cont.) Explain the differences between the historical depreciation methods and the capital cost allowance system (CCA) Use CCA to calculate annual depreciation charge and book value over an asset’s life for various asset classes Fully account for capital gains and losses , loss on disposal of fixed assets and recaptured CCA due to the disposal of a depreciated business asset Use the unit of production and depletion depreciation methods as needed in engineering economic analysis problems Income To evaluate if a company made money, an income statement or profit and loss statement is prepared Income statement lists: – Name of company – Period involved – Equation: Income = Revenue – Costs to obtain revenue
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Income Statement Since most items are paid within a period of 1 year, compare revenues for the year with expenses for the year Certain assets, physical capital assets , consisting of land, buildings, equipment and machines, last longer than 1 year and are paid for when they are obtained. So, need to find a way to allocate the cost of these assets over their useful life. Land doesn’t wear out, so is excluded. All other physical assets are said to depreciate. Income Statement Measure of a business’s success is its annual profit (or loss) Depreciation is mechanism to allocate cost of long-lived property over a number of years for the purpose of calculating annual income Basic Aspects of Depreciation Depreciation means “decrease in value” Value may mean market value, i.e. value others place on property, or value to the owner Machine may depreciate because of deterioration (wearing out no longer performing its function as well as when it was new) Obsolescence also causes depreciation, e.g. when new technology makes “old” machines obsolete
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Three Distinct Definitions of Depreciation 1. Decline in market value of an asset 2. Decline in value of an asset to its owner 3. Systematic allocation of cost of an asset over its depreciable life. This is the definition used to compute depreciation for business assets.
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