Chap008

Financial Accounting

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles Chapter 08 Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles ANSWERS TO QUESTIONS 1. Long-lived assets are noncurrent assets, which a business retains beyond one year, not for sale, but for use in the course of normal operations. Long-lived assets include land in use, plant and equipment, natural resources, and certain intangibles such as a patent used in operating the business. Long-lived assets are acquired because of the future use that is expected of them. Thus, they may be thought of as a bundle of future services to be used over a period of time to earn revenue. As those services are used, as in the case of a machine, the cost of the asset is allocated as a periodic expense (i.e., matched with revenue). 2. The fixed asset turnover ratio = Net sales [(Beginning net fixed asset balance + Ending net fixed asset balance) ÷ 2] This ratio measures how efficiently a company utilizes its investment in property, plant, and equipment over time. The ratio can also be compared to the ratio for the company’s competitors. 3. Long-lived assets are classified as follows: (1) Tangible long-lived assets—assets that are tangible (i.e., have physical substance) and long-lived (i.e., beyond one year); they are acquired for use in the operation of a business and are not intended for resale. They are comprised of three different kinds of assets: (a) Land—not subject to depreciation. (b) Plant and equipment—subject to depreciation. (c) Natural resources—mines, gravel pits, and timber tracts. Natural resources are subject to depletion. (2) Intangible long-lived assets—assets held by the business because of the special valuable rights that they confer; they have no physical substance. Examples are patents, copyrights, franchises, licenses, trademarks, technology, and goodwill. Intangible assets with definite lives are subject to amortization. 8-1
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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles 4. When a long-lived asset is acquired, it is recorded in the accounts in conformity with the cost principle. That is, the acquisition cost of a long-lived asset is the cash equivalent price paid for it plus all incidental costs expended to obtain it, to place it in the location in which it is to be used, and to prepare it for use. 5. In measuring and reporting long-lived assets, the matching principle is applied. As a long-lived asset is used, revenues are earned over a period of time. Over that same period of time, the long-lived asset tends to be used up or worn out. As a consequence, under the matching principle, the acquisition cost of the asset must be allocated to the periods in which it is used to earn revenue. In this way the cost of the asset is matched, as expense, with the revenues as they are earned from period to period through the use of the asset. 6.
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Chap008 - Chapter 08 - Reporting and Interpreting Property,...

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