Types of Expenditures
Revenue Expenditure immediately charged
against revenue as an
expense.
Capital Expenditure increase the company’s
investment in productive activity.
1
Plant Assets...
Are resources that:
have physical substance;
are used in the operations of a;
business
are not intended for sale to
customers.
Are recorded at cost.
cost consists of all expenditures
necessary to acquire the asset and
make it ready for its intended use.
2
Plant Assets
Cost is measured by:
the cash paid in a cash transaction,
or
the cash equivalent price paid when
noncash assets are used in payment.
The cash equivalent price is equal to:
the fair market value of the asset
given up, or
the fair market value of the asset
received, whichever is more clearly
determinable.
3
Plant Assets
Land - a building site, manufacturing
site, office site.
Land improvements
Buildings
Equipment
4
Cost of Land Includes:
the cash purchase price
closing costs such as title and
attorney's fees
real estate brokers commissions
accrued property taxes and other
liens on the land assumed by the
purchaser.
5
Cost of Land Improvements
Include:
All expenditures necessary to make
the improvements ready for their
intended use. Examples:
Drive ways
Parking lots
Fences
Underground sprinklers
6
Buildings Include:
All necessary expenditures
relating to the purchase or
construction of a building.
Examples
Stores
Offices
Factories
Warehouses
Airplane Hangers
7
Cost of Buildings Include:
All necessary expenditures
relating to the purchase or
construction of a building.
When a building is
purchased such costs
include the:
purchase price
closing costs (attorney's fees
title insurance)
real estate broker's
commissions.
8
Cost of Buildings Include:
Cost of making a building
ready for its intended use
consist of:
expenditures for remodeling
rooms or offices
replacing or repairing
roof
floors
electrical wiring
plumbing
9
Buildings
When a building is constructed, its
cost consists of:
the contract price
architect's fees
building permits
excavation cost
interest costs during
during construction.
10
Examples of Equipment
Store check-out counter
Office furniture
Factory Machinery
Delivery Equipment
Trucks
Airplanes
11
Cost of Equipment Includes:
purchase price
sales tax
freight charges and
insurance during transit
paid by the purchaser
expenditures required in
assembling
installing and testing the
unit.
12
Equipment
Two criteria apply in determining
the cost of equipment:
the frequency of cost - one time or
recurring
the benefit period - the life of the
asset or 1 year.
13
Advantages of Leasing an
Asset Versus Puchasing
Reduced risk of obsolescence
Little or no down payment
Shared tax advantages
Assets and liabilities not reported
14
Depreciation
Applies to three classes of plant
assets:
Land improvements
Buildings
Equipment.
NOT LAND!
15
Depreciable Assets
The revenue-producing ability of an
asset declines during its useful life
because of wear and tear.
A decline in revenueproducing ability may
also occur because of
obsolescence.
16
Depreciation is…
 The process of allocating to expense the cost
of a plant asset over its useful life in a
rational and systematic manner.
 A process of cost allocation, not a process of
asset valuation.
17
Land
Does not depreciate since its usefulness
and revenue producing ability generally
remain intact, or increase.
18
Accumulated Depreciation
The balance in Accumulated
Depreciation is not a cash fund.
19
Factors in Computing
Depreciation
New ART
20
Affects of Depreciation
Depreciation affects the balance
sheet through accumulated
depreciation, which is reported
as a reduction from plant assets.
Depreciation affects the income
statement through depreciation
expense.
21
Depreciation Methods
Straight-line
Declining-balance
Units-of-activity
22
Straight-line Method
Depreciable Cost*
________________________________________________________________________________________________________
The asset's useful life measured in
years
*(cost of the asset less its salvage
value)
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Straight-Line Depreciation
Formula
24
Year
25
2005
2004
2003
2002
Is the most
widely used
method of
depreciation.
Depreciation
is the same
for each year
of the
asset's
useful life.
2001
Straight-line Method
Partial Year Depreciation
If an asset is purchased during
the year rather than on January
1, the annual depreciation is
prorated for the proportion of a
year it is used.
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Year
27
2005
2004
2003
2002
Is an accelerated
method.
Accelerated
methods of
depreciation
result in more
depreciation in
the early years of
an asset's life
and less
depreciation in
the later years.
2001
Declining-Balance Method
Year
28
2005
2004
2003
2002
The life of an
asset is
expressed in
terms of the
total units of
production or
the use
expected from
the asset.
2001
Units-of-Activity Method
Depreciation and Income Taxes
The IRS allows corporate
taxpayers to deduct depreciation
when computing taxable income.
The IRS does not require the
taxpayer to use the same
depreciation method on the tax
return that is used in preparing
financial statements.
29
Depreciation and Income Taxes
Many large corporations use
straight-line depreciation in their
financial statements to maximize
net income.
At the same time they use a
special accelerated-depreciation
method on their tax returns to
minimize their income taxes.
30
Depreciation and Income Taxes
For tax purposes:
the straight-line method or
a special accelerated-depreciation
method called the
Modified
Accelerated
Cost
Recovery
System
The choice of depreciation method
must be disclosed in the notes to
31
financial statements.
Revising Periodic
Depreciation
When a change in an estimate is required,
the change is made in current and future
years but not to prior periods.
Significant changes in estimates must be
disclosed in the financial statements.
Extending an asset's estimated life reduces
depreciation expense and increases net
income for the period.
32
Ordinary Repairs
Expenditures to maintain
the operating efficiency
and expected productive
life of the asset.
Are usually small in
amount that occur
frequently throughout the
service life.
33
Ordinary Repairs
Examples:
motor tune-ups
 oil changes
 the painting of buildings
the replacing of worn-out gears
Ordinary repairs increase Repair
Expense and are revenue expenditures.
34
Additions and Improvements
Costs incurred to increase the:
operating efficiency
productive capacity or
 expected useful life of the plant
asset.
Are usually material in amount and
occur infrequently during the period
of ownership.
Are capital expenditures.
35
Impairment
A permanent decline in the
market value of an asset.
Is written down to the new
market value during the year in
which the decline occurs.
36
Plant Asset Disposals
The depreciation for the fraction of
the year to the date of disposal
must be recorded.
Depreciation Expense
Accumulated Depreciation
8,000
8,000
Compute Book Value:
Book Value =
Cost - Accumulated Depreciation
37
Sale of Plant Assets
In the sale of an asset, the
book value of the asset is
compared with the proceeds
from the sale.
If the proceeds exceed the
book value a gain on disposal
occurs.
Conversely, if proceeds from
the sale are less than the
book value a loss on disposal
occurs.
38
Retirement of Plant Assets
Is recorded by decreasing
Accumulated Depreciation for the
full amount of depreciation taken
over the life of the asset.
The asset account is reduced for
the original cost of the asset.
The loss is equal to the asset's
book value at the time of
retirement.
39
Analyzing Plant Assets
The two measures by which plant
assets are evaluated are:
Returns on Asset Ratio
Asset Turnover Ratio
40
Return on Assets Ratio
Indicates the amount of net income
generated by each dollar invested in
assets
Net Income
Average Assets
41
Asset Turnover Ratio



Indicates:
How efficiently a company
uses its assets?
How many dollars of sales are
generated by each dollar
invested in assets?
Net Sales
Average Total Assets
42
Asset Turnover Ratio
Two ways a company can increase
its return on assets:
Increase profit per sale-measured by profit margin ratio.
Increase its volume of sales-measured by the asset turnover
ratio=
Net Sales
Average Total Assets
43
Intangible Assets are
rights
privileges
competitive advantages
that result from ownership
of long-lived assets that do
not possess physical
substance.
44
Amortization...
Allocation of the cost of an
intangible asset to expense
over the shorter of:
its useful (economic) life
its legal life
40 years
45
Types of Intangible Assets
Patents
Copyrights
Trademark or Trade Names
Franchises and Licenses
Goodwill
PATENT
46
Patents
An exclusive right issued by the
U.S. Patent Office that enables
the recipient to manufacture,
sell, or control a patent for 17
years from the date of grant.
47
Patents
The initial cost of a patent is cash
or cash equivalent price paid to
acquire the patent.
Legal costs of protecting a patent
in an infringement suit are added
to the Patent account and
amortized over the remaining life
of the patent.
48
Research and
Development Costs
Because of the uncertainty
of identifying the extent
and timing of future
benefits, these costs are
usually recorded as an
expense when incurred.
49
Average Age of Plant Assets
Most companies use straight-line
depreciation for financial
reporting.
Average age of plant assets =
Accumulated Depreciation
Depreciation Expense
50
Copyrights
Copyrights are granted by the
federal government giving the
owner the exclusive right to
reproduce and sell artistic or
published work.
Copyrights extend for the life of
the creator plus 50 years.
51
Licenses
Operating rights granted by a
government body permit the
enterprise to use public property
in performing its service (i.e. the
use of airwaves for radio or TV
broadcasting).
52
Costs Associated with
Franchise or License
When costs can be identified with
the acquisition of the franchise or
license, an intangible asset
should be recognized.
Annual payments made under a
franchise agreement should be
recorded as operating expenses.
53
Goodwill
Goodwill represents the value of
all favorable attributes that relate
to a business enterprise,
including:
exceptional management
desirable location
good customer relations
skilled employees, etc.
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