311-Ch08RevNotes(7th) - Chapter 8 - Reporting and...

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Chapter 8 - Reporting and Interpreting Property, Plant, and Equipment; Natural resources; and Intangibles Overview This chapter discusses accounting for long-lived productive assets. These are the non-current assets that a business retains for long periods of time for use in the course of normal operations rather than being held for sale. They include tangible assets and intangible assets. At acquisition, an asset is recorded at cost. Cost includes the cash equivalent purchase price plus all reasonable and necessary expenditures made to acquire and prepare the asset for its intended use. Expenditures related to long-lived assets are classified in two groups. Capital expenditures are those expenditures that provide benefits for one or more accounting periods beyond the current period; therefore, they are debited to appropriate asset accounts and depreciated, depleted, or amortized over their useful lives. Revenue expenditures are those expenditures that provide benefits during the current accounting period only; therefore, they are debited to appropriate expense accounts when incurred. A long-lived productive asset represents a bundle of future services and benefits that have been paid for in advance. As this asset is used, this bundle of services is gradually used to earn revenue. In conformity with the matching principle, cost (less any estimated residual value) is allocated to expense over the periods benefited. In this way, the expense associated with the use of operational assets is matched with the revenues earned. This allocation process is called depreciation in the case of property, plant, and equipment; depletion in the case of natural resources; and amortization in the case of intangibles. Three of the most widely used methods of depreciation are straight-line, units-of-production, and declining-balance. The disposal of long-lived assets is recorded by removing the cost of the asset and the related accumulated depreciation account. A gain or loss on the disposal will result when the disposal price is different from the book value of the asset. When an asset’s ability to provide benefits in the future is impaired, the asset is written down. Business Background Management faces the challenges of forecasting long-term productive capacity. Underestimates by managers may reduce sales due to the inability of capacity to meet demand. Overestimates may reduce profits since the excess costs must be absorbed by lower sales levels. In either event, net income is reduced when forecasting productive capacity is in error. Capacity for service companies suffers from forecasting errors because lost hours or lost facilities are forgone revenues. Service type companies cannot inventory hours or space for future sales. Examples include airlines, hotels, CPA firms, and law firms. If a manufacturer or merchandiser forecasts capacity Chapter 8 Review Notes Acc 311 - Page 1
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311-Ch08RevNotes(7th) - Chapter 8 - Reporting and...

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