AFM
Chapter 9 Reporting and Interpreting Property, Plant, and Equipment Natural Resources and Intangible

Chapter 9 Reporting and Interpreting Property, Plant, and Equipment Natural Resources and Intangible

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Chapter 9: Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles November 18, 2013 2:24 AM ACQUISITION AND MAINTENANCE OF PLANT AND EQUIPMENT Classification of Long-Lived Assets Long-lived (or long-term/capital) assets: tangible or intangible resources owned by a business and used in its operations to produce benefits over several years Not normally sold to generate revenue Have the following characteristics: o Tangible assets have physical substance Land, does not become obsolete so it is never depreciated, but may be impaired in value Buildings, fixtures, and equipment, Natural resources, including mineral deposits such as gold or iron ore, oil wells and reserves o Intangible assets have no physical substance Have property ownership rights E.g. name, logo, slogans, computer software, etc. Often arise from intellectual effort and are known as intellectual property e.g. copyrights, patents, licenses, trademarks, etc. Fixed Asset Turnover (RATIO) Fixed Asset Turnover = Net sales (or operating revenues) Average Net Fixed Assets Measures sales dollars generated by each dollar of fixed assets used High rate = effective management Increasing rate = more efficient fixed asset use Creditors + security analysts use to assess company's effectiveness in generating sales from long- lived assets Lower or declining rate may indicate that a company is expanding in anticipation of higher sales Increasing ratio could also signal that a firm has cut back on capital expenditures (expects downturn) Measuring and Recording Acquisition Cost Renovation and repair costs incurred by the purchaser prior to the asset's use should be included as part of its cost Acquisition cost: net cash equivalent amount paid or to be paid for the asset Various Acquisition Methods For cash
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o When acquiring productive assets, a company may pay with cash that was either generated form operations or cash that was recently borrowed For debt o Credit note payable and cash For equity o Credit common shares and cash o When a non-cash consideration is included in the purchase of an asset, the cash- equivalent cost is determined By construction o May construct asset instead of purchasing o Acquisition cost of constructed asset will include all direct and indirect costs of construction Interest on any loans obtained to construct the asset Accumulated construction costs will be depreciated over its productive life Amount of interest included in the cost of construction is called capitalized interest Reduces company's total interest expense every year until the facility is ready to use Once construction of facility is completed, any interest costs on construction loans must now be expensed As a basket purchase of assets o Basket Purchase: an acquisition of two or more assets in a single transaction for a single lump sum o Paying $300,000 cash to purchase a building and the land
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