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Lecture Financial accounting (10th edition): Chapter 9 - Pratt, Peters

Chapter 9 - Long-lived assets. This chapter explain the difference between capitalizing costs and expensing costs, and compare how these two accounting treatments affect net income across time. | 2 Chapter 9: Long-Lived Assets 2 3 Learning Objective 1 Explain the difference between capitalizing costs and expensing costs, and compare how these two accounting treatments affect net income across time. 4 Long – Lived Assets Land The cost of real estate used in operation Fixed Assets Buildings, machinery, and equipment which are often located on the ‘land’ real estate Natural Resource Costs The costs of acquiring the rights to extract natural resources Intangible Assets Rights, privileges, and benefits of possession rather than physical existence Deferred Costs Intangible assets often including prepaid expenses that provide benefits for a length of time extending beyond the current period 5 Long – Lived Assets Categorizations are firm specific Land is inventory for a real estate firm, but is a long-lived asset for a retailer Long-lived assets represent the company’s capacity to produce and sell goods and/or services in the future Planning and executing major capital expenditures . | 2 Chapter 9: Long-Lived Assets 2 3 Learning Objective 1 Explain the difference between capitalizing costs and expensing costs, and compare how these two accounting treatments affect net income across time. 4 Long – Lived Assets Land The cost of real estate used in operation Fixed Assets Buildings, machinery, and equipment which are often located on the ‘land’ real estate Natural Resource Costs The costs of acquiring the rights to extract natural resources Intangible Assets Rights, privileges, and benefits of possession rather than physical existence Deferred Costs Intangible assets often including prepaid expenses that provide benefits for a length of time extending beyond the current period 5 Long – Lived Assets Categorizations are firm specific Land is inventory for a real estate firm, but is a long-lived asset for a retailer Long-lived assets represent the company’s capacity to produce and sell goods and/or services in the future Planning and executing major capital expenditures are some of management’s most important concerns 6 The Relative Size of Long-Lived Assets 7 Long-Lived Asset Accounting: General Issues and Financial Statement Effects Matching Principle states that expenses must be matched against revenues Accordingly, the cost of acquiring a long-lived asset which will benefit the company over time is capitalized (booked as an asset) As revenues are recognized, the costs are amortized 8 Long-Lived Asset Accounting: General Issues and Financial Statement Effects Three basic questions What dollar amount should be included in the capitalized cost of the long-lived asset? Over what time period should this cost be amortized? At what rate should this cost be amortized? 9 Long-Lived Asset Accounting: General Issues and Financial Statement Effects 10 Long-Lived Asset Accounting: General Issues and Financial Statement Effects 11 The purpose of recording depreciation expense is to: a. provide cash necessary to replace plant assets when they are used up. b. .