PPE & Intangibles

Cards (48)

  • Tangible assets are land, PPE and natural resources.
  • Examples of intangible assets are patents, copyrights and trademarks.
  • Tangible and intangible assets are the fixed assets used during normal operations rather than for sale.
  • Residual value is the estimated amount to be recovered on disposal of an asset at the end of its estimated useful life.
  • The least and latest rule entails choosing to pay the lowest amount of tax legally permitted and at the latest possible date to invest the money in the meantime and earn ROI.
  • Fixed Asset Turnover Ratio = Net Sales / Average Net Fixed Assets
  • Average Net Fixed Assets = (Beginning + Ending Fixed Asset Balances) / 2
  • The Fixed Asset Turnover Ratio measures the sales dollars generated for each dollar of fixed assets. A high ratio suggests effective management.
  • A lower Fixed Asset Turnover Ratio may indicate that a company is expanding by acquiring more assets in anticipation of higher future sales.
  • Acquisition Cost is the net cash equivalent amount paid for an asset.
  • Under the cost principle, all reasonable expenditures in acquiring and preparing the asset for use should be recorded as the asset's cost. These are capitalised costs. However, any associated interest charges are recorded as expenses.
  • Renovation and repair costs incurred before an asset’s use are capitalised costs.
  • When purchasing land, property and equipment as a group (basket purchase), the total capitalised cost is allocated to each asset in proportion to its market value relative to the overall market value of the purchase.
  • Example of a basket purchase capitalised cost allocation: Building Cost = Total Cost of Basket Purchase * Market Value of Building / Total Market Value of Basket Purchase
  • Capitalised Interest is the interest expenditures included in the cost of a self-constructed asset.
  • Expenditures made after an asset has been acquired are classified as ordinary repairs and maintenance or improvements.
  • Ordinary Repairs and Maintenance are expenses that maintain the productive capacity of an asset during the current accounting period only.
  • Improvements are expenditures that increase an asset's productive life, operating efficiency, or capacity and are recorded as increases in asset accounts, not expenses.
  • Capitalising expenses will increase assets and net income in the current year, lowering future years’ income by the annual depreciation. Expensing the amount in the current period will lower taxes immediately.
  • Depreciation is the process of allocating the cost of buildings and equipment (but not land) over their productive lives using a systematic and rational method. It is a process of cost allocation, not a measure of market value.
  • At the end of the period, a depreciation expense is debited, and the accumulated depreciation in the contra-asset account is credited.
  • Closing Book Value = Opening Book Value - Depreciation Expense
  • The book value as a percentage of the original cost approximates an asset’s remaining life.
  • Straight-Line Depreciation - the depreciation expense is spread out evenly across an asset’s useful life
  • Straight-Line Depreciation Expense = Straight-Line Depreciation Rate * Depreciable Cost
  • Straight-Line Depreciation Rate = 1 / Useful Life
  • Depreciable Cost = Asset Cost - Residual Value
  • Units of Production Depreciation - expenses mirror the physical use of the asset
  • Depreciation per Unit = Depreciable Cost / Useful Units
  • Units of Production Depreciation Expense = Depreciation per Unit * Number of Units Produced
  • Double-Declining Balance Depreciation - uses a multiple of the straight-line rate to assign a greater proportion of the cost to the early years of an asset’s life
  • Double-Declining Balance Depreciation Expense = 2 * Straight-Line Depreciation Rate * Opening Book Value
  • Before the end of the useful life, if the double-declining balance depreciation expense reduces the value below the residual value, only the amount needed to reach the residual value is recorded as the depreciation expense.
  • Increasing the estimated useful life would reduce depreciation expenses and increase profitability.
  • Revised Depreciation Expense = (Net Book Value - New Residual Value) * 1 / Remaining Life
  • Impairment is a permanent reduction in the value of an asset
  • An asset is impaired when the Net Book Value > Future Cash Flows
  • Impairment Loss = Net Book Value - Fair Value
  • An impairment expense is debited, and the lost asset value is credited.
  • If an asset is disposed of before the end of its useful life, cash and accumulated depreciation are debited, and the asset and gain are credited.