Lecture 5--Pre-recorded--B30000 Class Notes_inclass.pdf -...

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Fixed Assets and Midterm Review Anastasia A. Zakolyukina BUS 30000: Financial Accounting Lecture 5 Pre-recorded
Lecture 5 topics Ѵ Fixed Assets (Part 1) Accounting for fixed assets Purchase and sale Depreciation and impairment Ѵ What to look for in a statement of cash flows (Part 2) Ѵ Midterm review (Part 3)
FIXED ASSETS
Vocabulary for assets Ѵ Long-lived assets are operating assets that are expected to yield economic benefits over a period longer than one year In contrast to expenses, we “capitalize” long-lived assets Ѵ Firms own two main types of long-lived assets Tangible (“fixed”) assets Physical assets, e.g., land, PP&E Intangible assets No physical existence, yet are not financial instruments, e.g., patents, trademarks, goodwill Ѵ Fixed assets are generally recorded at their net book value : the original historical cost minus accumulated depreciation Historical cost Acquisition costs (Accumulated Depreciation) Depr.-to-date + impairments Net Book Value Value reflected on balance sheet
Fixed assets Ѵ Acquisition costs Include all costs of acquisition and preparation for use (including installation & repair costs prior to use) After the equipment is in use, ordinary repairs are expensed on the income statement Ѵ Accounting subsequent to acquisition • Depreciation reflects a systematic allocation of the cost of the asset to the periods in which the asset provides benefits Matching costs to revenues • Impairments reflect a mark-down to Fair Market Value When asset values are impaired, GAAP mandates write-downs Impairment = Net book value – Fair Market Value GAAP prohibits adjustment for upward revisions in the value of fixed assets
Depreciation Depreciation is not intended to track the assets market value! Depreciation is not a cash expense
Acquisition and depreciation: basic example (1) Purchase depreciable asset on January 1 of Year 1 for $100 in cash (2) Straight line depreciation over 10 years; residual value = 0 Property, Plant and Equipment (A) BB 100 EB Cash (A) BB 100 EB Depreciation Expense (E, SE) 10 Accumulated Depreciation (XA) 10 BB EB
Effect of a change in acquisition cost Suppose the purchase price of the asset bought at the beginning of the year was $200 instead of $100 Assuming S.L. depreciation, a 10-year useful life and no salvage value, what would be the effect on the Year 1 Financial Statements? Ѵ Effect on Income Statement in Year 1 Ѵ Effect on Balance Sheet at the end of Year 1 Ѵ Effect on Statement of Cash Flow in Year 1
Impairment When asset values are impaired, GAAP mandates write-downs Book Value = $50 mln Fair value = $0 Impairment = Net book value – Fair market value = $50 mln
Impairment: basic example (2b) On January 1 of Year 4, learn that the Fair Market Value for the asset is $60 Net Book Value (NBV) = Historical Cost – Accumulated Depreciation Impairment = NBV – Fair Market Value On January 1 of Year 4, NBV = 100 – 30 = 70 Impairment = 70 – 60 = 10 Accumulated Depreciation (XA) 30 10 BB (2b) EB Depreciation Expense (E, SE) (2b) 10
Sale of asset: basic example (3) Sell the asset on January 1, Year 6 for $70.

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