34. Current assets, such as marketable securities and inventory, usually are expected to be turned into cashwithin:A. one monthB. five yearsC. one yearD. eighteen monthsE. two yearsTitle: ANSWER: C REFERENCE: The Balance Sheet LEARNING OUTCOME: 4 Show
35. Fixed assets are property and buildings that a firm expects to use for more than: 36. Which of the following assets is NOT an example of a fixed asset for a manufacturer of road buildingequipment? Title: ANSWER: A REFERENCE: The Balance Sheet LEARNING OUTCOME: 4October 22, 2018399 37. _____ is the process of distributing the original cost of a long-term asset over the years of its useful life. Title: ANSWER: C REFERENCE: The Balance Sheet LEARNING OUTCOME: 438. _____ is the company's ability to expense fixed assets over their useful life.A. AmortizationB. AccelerationC. DepreciationD. Capital budgetingE. MaturationRATIONALE: Depreciation is the process of distributing the original cost of a long-term asset over the yearsof its useful life.Title: ANSWER: D REFERENCE: The Balance Sheet LEARNING OUTCOME: 4 39. Sullins Cleaning Service has purchased a new pressure washer for $18,000.Sullins Cleaning is allowedto charge a portion of the company’s cost during its useful life against the profits it generates.This practiceis called: 40. For which of the following assets would a wholesale company use depreciation? Title: ANSWER: D REFERENCE: The Balance Sheet LEARNING OUTCOME: 4 What are fixed assets?Fixed assets—also known as tangible assets or property, plant, and equipment (PP&E)—is an accounting term for assets and property that cannot be easily converted into cash. The word fixed indicates that these assets will not be used up, consumed, or sold in the current accounting year. Yet there still can be confusion surrounding the accounting for fixed assets. Virtually all businesses have a fixed asset investment. Fixed assets are used in the production of goods and services to customers. This investment can range from a single laptop to a fleet of trucks to an entire manufacturing facility or an apartment building for rent. Tips for fixed asset capitalization rules and policyFor most businesses, fixed assets represent a significant capital investment, so it is critical that the accounting be applied correctly. Here are some key facts to understand and insights to keep in mind:
Capitalizing software costsGAAP includes specific guidance for accounting for costs of computer software that is purchased for internal use. Capitalized costs consist of the fees that are paid to third parties to purchase and/or develop software. Capitalized costs also include fees for the installation of hardware and testing, including any parallel processing phase. Costs to develop or purchase software that allows for the conversion of old data are also capitalized. However, the data conversion costs themselves are expensed as incurred. Training and maintenance costs, which are often a significant portion of the total expenditure, are expensed as period costs. Upgrade and enhancement costs should be expensed unless it is probable that they will result in additional functionality. When an organization purchases software from a third party, the purchase price may include multiple elements such as software training costs, fees for routine maintenance, data conversion costs, reengineering costs, and costs for rights to future upgrades and enhancements. Such costs should be allocated among all individual elements, with allocations based on objective evidence of fair value of the contract elements, not necessarily the separate prices for each element stated in the contract, and then capitalized and expensed accordingly. The ins and outs of depreciationDepreciation is the process of allocating the cost of the asset to operations over the estimated useful life of the asset. For financial reporting purposes, the useful life is an asset’s service life, which may differ from its physical life. An asset’s estimated useful life for financial reporting purposes may also be different than its depreciable life for tax reporting purposes. Furthermore, the objectives of financial reporting and tax depreciation are different; generally, tax methods and lives take advantage of rules that encourage investments in productive assets by permitting a faster write-off, whereas depreciation for financial reporting purposes is intended to match costs with revenue. The service life for financial reporting is an estimate made by management, considering some of the following factors:
The service life may be based on industry standards or specific to a business based on how long the business expects to use the asset in its operations. Certain assets may be used until they are worthless and are disposed of without remuneration, while others may still have value to the business at the end of their service life. If an asset will have a residual value at the end of its service life that can be realized through sale or trade-in, depreciation should be calculated on cost less the estimated salvage value. Remember, the depreciable life is the term that the asset is used by the owner, but if the asset is not worthless at the end of that life, estimated salvage value should be considered. For example, most businesses use five years as the useful life for automobiles. In practice, a particular business may have a policy of purchasing and trading in automobiles every three years. In this case, three years, not five, should be the estimated useful life for depreciation, but the trade-in value must be estimated and used in the calculation of depreciation (the cost, less the estimated salvage value, should be depreciated over the three-year service life to the business). As with all accounting rules, materiality should be considered in determining whether the recognition of residual values is needed. While straight-line depreciation is the method most commonly used, other methods such as units of production, sum of the year’s digits, and declining balance exist. As estimates, useful lives should be evaluated during an asset’s life, and changes should be made when appropriate. Changes in estimates are accounted for prospectively. Impairment testingFixed assets should be tested for impairment individually, or as part of a group, when events or changes in circumstances indicate that an asset’s carrying value may exceed its gross future cash flows. Such circumstances include the following:
Keep in mind that impairment accounting applies to a situation when a significant asset, or collection of assets, is not as economically viable as originally thought. Isolated incidents when a particular asset may be impaired are usually not material enough to warrant recognition. In those cases, a change in an asset’s estimated life for depreciation may be all that is needed. Impairment is typically a material adjustment to the value of an asset or collection of assets. It is, in essence, an acceleration of depreciation to account for the lower future benefits to be received from the asset; the charge for impairment is recorded as part of income from operations in the same section of the statements as depreciation. Leasing fixed assetsKeep in mind that not all fixed assets are purchased by a business. Most businesses utilize both purchasing and leasing to acquire fixed assets. Under current accounting rules, assets under capital leases are capitalized by the lessee. Depreciable lives of assets under capital leases are generally the asset’s useful life (for leases with a transfer of ownership to the lessee at the end of the lease) or the term of the related lease (for all other capital leases). Leases of real estate are generally classified as operating leases by the lessee; consequently, the leased facility is not capitalized by the lessee. However, improvements made to the property—termed leasehold improvements—should be capitalized when purchased by the lessee. The depreciation period for leasehold improvements is the shorter of the useful life of the leasehold improvement or the lease term (including renewal periods that are reasonably certain to occur). In February 2016, the Financial Accounting Standards Board issued a new accounting standard for lease accounting. The new standard will replace existing classifications of capital and operating leases. Under the new standard, all long-term leases will require capitalization of a right-of-use asset. The effect of the new standard will result in an increased number of assets being capitalized by lessees. Fixed asset accounting takeawaysGiven all the various principles, rules and policies surrounding fixed assets, here is a recap of the most important dos and don’ts to remember: Do:
Don’t:
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What is the company's ability to expense fixed assets over their useful life?Depreciation is an accounting convention that allows companies to expense a portion of long-term operating assets used in the current year. It is a non-cash expense that increases net income but also helps to match revenues with expenses in the period in which they are incurred.
Which of the following are classified as fixed assets on the balance sheet?Fixed assets are long-term assets. This means the assets have a useful life of more than one year. Fixed assets include property, plant, and equipment (PP&E) and are recorded on the balance sheet with that classification.
What is a yearly document that describes a firms financial status and usually discusses a firms financial activities during the past year and its prospects for the future?Financial statements are the chief element of the annual report, a yearly document that describes a firm's financial status. Annual reports usually discuss the firm's activities during the past year and its prospects for the future.
What is a summary of what a company has earned and spent over a given period?An income statement is a key financial document for your business. It shows what your company earns, what it spends and if it's making a profit over a specific period of time. It is also an important tool for managing your business and planning your strategy.
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