Financial Accounting
Week 1
Winter 2025
Professor Nan Li
University of Toronto
What is this course about?
 What do business use to generate profits?
 Long-lived Assets: tangible and intangible assets (Chapter 7)
 How do people usually finance their business, or how do companies finance
new projects?
 Liabilities (Chapter 8 and 9) and Shareholder’s Equity (Chapter 10)
 How much cash is earned? Where do they come from? How are they used?
 Cash flow statement (Chapter 11)
 How are these information related on financial statement? How do we
evaluate a company within and across an industry? Where do we obtain
financial information for effective business decision making
 Analyze financial statements (Chapter 12)
 Red flags for accounting fraud
Course component
Component
On Line Assignment (4 in total)
B01 Review On Line Quiz
Case Assignment
Mid Term Test (Chap 7-9)
Final Exam (All)
Total
How to best prepare for the course, I think:
a. Read related chapter in textbook before class, gives you
a broad framework;
b. Come to class, focus and ask questions
c. Review and do homework
Weight/Value
5%
5%
10%
35%
45%
100%
Office hours
My office hours: Monday 5:10 to 6:10pm,
Friday 10 to 11am, Zoom office hour, see syllabus for link
TA office hours: see Quercus, starts on Feb 2nd
Tutorial sessions: 3 before midterm, 4 before final exam, starting on Jan 20, go
through problem sets, can attend any session and will be recorded
Tutorial questions are on page 16 of the course syllabus
Chapter 7: Reporting and
Interpretation Long-Lived Assets
FedEx Corporation

FedEx Express

FedEx Ground

FedEx Freight

FedEx Services

Over 684 aircraft, 212,000 vehicles in 220 countries, more than 570,000 team
members handles almost 19 million average daily shipments.

Capital intensive with more than 35.7 billion in PPE, in 2021 5.9 billion on
capital expenditures.

Focus: get a product to a customer in the fastest, at as low a shipping cost as
possible; to achieve the highest overall long-term return on capital, with
more fuel-efficient aircraft
PPE/TA:
Long-Lived Assets Definitions

Long-lived assets are those expected to provide
an economic benefit to the reporting entity for a
period greater than one year.

Tangible Items with physical substance, PPE
 Land (no depreciation)
 Buildings, fixtures and equipment
 Biological asset
 Natural resources

Intangible Items with property ownership rights
but no physical substance
 copyrights, patents, licences, trademarks,
software, franchises, and subscription lists, etc.
Fixed Asset Turnover Ratio

How effectively is management utilizing its property, plant, and
equipment to generate revenues?
*[Beginning + Ending balances of Property, plant, and equipment (net of
accumulated depreciation)] ÷ 2

The 2021 ratio for FedEx is
$83,959
= 2.42
($33,608 + $35,752)/2
Fixed Asset turnover ratio

Bell?

Amazon?

Gildan (Clothing manufacture)?
Fixed Asset turnover ratio

Bell?

Amazon?

Gildan (Clothing manufacture)?
Long-lived Assets-Four Issues
Issue 1: Cost Capitalization

What is a long lived asset ?


Tangible & Intangible Assets
Measuring and Recording Acquisition Cost

Journal Entries (Paid by cash, debt or common shares)

Basket Purchase

Repairs, Maintenance & Additions
Issue 2: Cost Allocation

Depreciation Concepts--Methods of Depreciation
Issue 3: Impact of New Information

Measuring Asset Impairment

Changes in Depreciation Estimates
Issue 4: Disposal
The idea behind accounting for long-lived assets

These assets provide benefits to multiple accounting periods and are
therefore capitalized (recognized as an asset) rather than expensed
immediately.
Dr. PPE/Intangible (A) XXXX
Cr. Cash (A)
XXXX

When do firms transfer costs from the balance sheet to the income
statement?



(instead of expensing)
When consumed, i.e., in the periods when the company benefits from their use
(matching).
If a firm consumes the asset in the process of generating revenues (e.g., a
machine), the firm should record an expense (allocate a portion of the cost).
After the firm acquires an Asset, it should attempt to match the cost of
that asset with revenues the asset generates:

Matching is done by the (somewhat) arbitrary process of depreciation.




Depreciation: allocating the cost of a tangible asset
Amortization: allocating the cost of an intangible asset
Depletion: allocating the cost of natural resources
Impairment: reduction in book-value when the firm has information indicating a
decline in market value.
Determining Acquisition Cost for Tangible Assets

The cost principle requires that all reasonable and necessary costs made in
acquiring and preparing an asset for its intended use should be recorded as
part of the cost of the asset.

Costs are capitalized when they are recorded as assets on the
statement of financial position instead of as expenses on the
statement of earnings in the current period. These costs, including:

Purchase price, sales taxes, legal fees, transportation costs, and
installation costs. Special discounts should not be included and interest
charges should be reported as interest expense (except interest
expense during the construction period for self-construction
equipment).

Renovation and repair costs incurred by the purchaser prior to the
asset’s use (for old building and machinery)

company purchases land, all of the incidental costs paid by the
purchaser—such as title fees, sales commissions, legal fees, title
insurance, delinquent taxes, and surveying fees (for undeveloped land)
Intangible Assets

Internally-developed

R&D (Patents), Advertising (Brand Value), Training (Human
Capital)

Costs are expensed immediately

Exception: Internally developed software post technological feasibility point.
 Purchased -- Costs are capitalized as an asset (exception purchase of
in-process technologies).
 Patents, licenses, trademarks, software costs, goodwill.

In cases when purchased assets have a determinable useful life,
they are amortized over this life. Alternatively, purchases of
intangibles are reviewed for impairment.

Goodwill (costs in excess of net assets acquired) represents the
future economic benefits that arise from other assets acquired in
a business combination that are not identified individually or
recognized separately.
Netflix 10-K
Costs incurred
during the
application
development stage
for software
programs to be used
solely to meet our
internal needs are
capitalized.
Capitalized software
costs are included in
property and
equipment, net and
are amortized over
the estimated useful
life of the software,
generally up to
three years.
Determination of Acquisition cost
Various Acquisition Methods

For Cash
For Debt

For Equity
By Construction: 2 million in labor costs, 5
million in supplies, and 1 million for interest expense
Acquisitions as a Basket Purchase of
Assets
On January 1, WestJet purchased land and building for $300,000 cash. The
appraised values are building, $189,000, and land, $126,000. How much of
the $300,000 purchase price will be charged to the building and land
accounts?
Acquisitions as a Basket Purchase of
Assets
Asset
Appraised
Value
% of
Value
Purchase
Price
Assigned
Cost
b*
c
b × c
Land
Building
Total
a
$ 126,000
189,000
$ 315,000
* $126,000 ÷ $315,000 = 40%
40%
60%
100%
Acquisitions as a Basket Purchase of
Assets
Asset
Appraised
Value
% of
Value
b*
Land
Building
Total
a
$ 126,000
189,000
$ 315,000
Purchase
Price
Assigned
Cost
c
b × c
40% × $ 300,000 = $ 120,000
300,000 =
60% ×
180,000
100%
$ 300,000
* $126,000 ÷ $315,000 = 40%
Prepare the journal entry to record the
purchase of land and building.
Acquisitions as a Basket Purchase of
Assets
GENERAL JOURNAL
Date
Jan.
Description
1 Land (+A)
Building (+A)
Cash (-A)
Debit
Page 11
Credit
120,000
180,000
300,000
Repairs, Maintenance, and Improvements

Which one gives you a higher earnings?

Ordinary repairs and maintenance: expenditures for normal operation upkeep of long-lived
assets.

Improvements: Expenditures that increase productive lift, operating efficiency, or capacity of
the assets.
Repairs, Maintenance, and Improvements
Financial Statement Effect
Treatment
Statement
Expense
Current Current
Earnings Taxes
Capital
Expenditure
Statement of
financial position
account debited
Deferred
Higher
Higher
Revenue Statement of earnings Currently
Expenditure
account debited
recognized
Lower
Lower
To solve this classification problem, many companies
have policies regarding the expensing of all
expenditures below a certain amount according to the
materiality constraint.
M7-3 Identifying Capital Expenditures and Expenses
For each of the following items, enter the correct letter to the left to show the type of
expenditure. Use the following:
Type of Expenditure
Transactio
ns
C Capital
expenditure
E Expense
—
(1) Purchased a patent, $4,300 cash.
—
(2) Paid $10,000 for monthly salaries.
N Neither
—
(3) Paid cash dividends, $20,000.
—
(4) Purchased a machine, $7,000; signed a
long-term note.
—
(5) Paid premium for a three-year insurance
policy, $900.
—
(6) Paid for routine maintenance, $200.
—
(7) Paid $400 for ordinary repairs.
—
(8) Paid $6,000 for improvements that
lengthened the asset’s productive life.
(9) Paid $20,000 cash for addition to old
building.
—
Issue 2:Depreciation Concepts: Why do
we depreciate PPE?
Depreciation is a cost allocation process that systematically and rationally
matches acquisition costs of operational assets with periods benefited by
their use.
Statement of
Financial Position
Statement of Earnings
Acquisition
Cost
Cost
Expense
(Unused)
Allocation
(Used)
Depreciation
Expense
Depreciation for
the current year
Statement of
Earnings
Accumulated
Depreciation
Total of depreciation
to date on an asset
Statement of
Financial Position
Depreciation and Amortization
 Tangible Asset
 Dr. Depreciation Expense xxx

Cr. Accumulated Depreciation (BS-xA) xxx
 Intangible Asset
 Dr. Amortization Expense xxx

Cr. Accumulated Amortization (BS-xA) xxx
Carrying Amount: Acquisition cost –
Accumulated dep – write down
Property and Equipment:
Aircraft
Less: Accumulated depreciation
$ 3,096,468
1,251,654
$ 1,844,814
Buildings and leasehold improvements
Less: Accumulated depreciation
152,462
25,561
126,901
Other assets under finance leases
Less: Accumulated depreciation
14,705
821
13,884
Carrying Amount
(= Net Book Values)
Carrying amount
=/ Market value
Depreciation Concepts
The calculation of depreciation requires
three amounts for each asset:
 Acquisition cost.
 Estimated useful life to the company.
 Estimated residual value.
Alternative depreciation methods:
 Straight-line
 Units-of-production
 Accelerated Method: Declining balance
Depreciation Concepts
Useful Life is the
expected service
life of an asset
to the present
owner.
Residual (or Salvage)
Value is the
estimated amount
to be recovered,
less disposal costs
at the end of
estimated useful
life of an asset.
Straight-Line Method
Depreciation
Expense per Year
=
Cost – Residual Value
Useful Life in Years
At the beginning of the year, WestJet purchased ground equipment for $62,500 cash.
The equipment has an estimated useful life of 3 years and an estimated residual value
of $2,500.
Depreciation
Expense per Year
=
Depreciation
Expense per Year
=
$62,500 – $2,500
3 years
$20,000
SL
Straight-Line Method
Depreciation Accumulated
Expense
Depreciation
Year
(debit)
(credit)
1
2
3
$ 20,000
20,000
20,000
$ 60,000
$
$
20,000
20,000
20,000
60,000
Accumulated
Carrying
Depreciation
Amount
(net book value)
Balance
$
62,500
$
20,000
42,500
40,000
22,500
60,000
2,500
Residual Value
SL
More companies use the straight-line method of
depreciation in their financial reports than all other
methods combined.
Which company uses straight-line
depreciation?

E.g. High Liner Foods Incorporated, processes and markets prepared and
packaged seafood products:

The estimated useful lives applicable to each category of ppe, except for
land:

Buildings 15-60 years

Furniture, fixtures and production equipment 10-25 years

Computer equipment and vehicles 4-11 years
Units-of-Production (Activity) Method
Step 1:
Depreciation =
Rate
Cost – Residual Value
Life in Units of Production
Step 2:
Number of
Depreciation
Depreciation
× Units Produced
=
Expense
Rate
for the Year
At the beginning of the year, WestJet purchased ground
equipment for $62,500 cash. The equipment has a 100,000
kilometre useful life and an estimated residual value of $2,500.
If the equipment is used 30,000 kilometres in the first year, what
is the amount of depreciation expense?
Units-of-Production Method
Step 1:
Depreciation =
Rate
$62,500 – $2,500
100,000 km
= $0.60 per km
Step 2:
Depreciation
= $0.60 per km × 30,000 km = $18,000
Expense
Year
1
2
3
Depreciation
Kilometres
Expense
30,000
50,000
20,000
100,000
$
$
18,000
30,000
12,000
60,000
Accumulated
Depreciation
Balance
$
18,000
48,000
60,000
Residual Value
Carrying
Amount
(net book value)
$
62,500
44,500
14,500
2,500
Accelerated Depreciation
Accelerated depreciation matches higher
depreciation expense with higher revenues
in the early years of an asset’s useful life
when the asset is more efficient.
Depreciation
Repair
Expense
Expense
Early Years
High
Low
Later Years
Low
High
Declining-Balance Method
Declining balance rate
of 2 is double-decliningbalance (DDB) rate. (The rate can be
other numbers: e.g. declining-balance
method based on a 150 percent
acceleration rate).
Cost – Accumulated Depreciation
Annual
Depreciation
expense
= Carrying
Amount
×
(
2
Useful Life in Years
)
Annual computation ignores residual value.
At the beginning of the year, WestJet purchased equipment for $62,500 cash. The
equipment has an estimated useful life of 3 years and an estimated residual value
of $2,500.
Calculate the depreciation expense for the first two years.
Declining-Balance Method
Annual
Carrying
Depreciation =
×
Amount
expense
(
2
Useful Life in Years
)
Year 1 Depreciation:
$62,500 ×
(
2
3 years
) = $41,667
Year 2 Depreciation:
($62,500 – $41,667) ×
(
2
3 years
) = $13,889
Declining-Balance Method
Year
1
2
3
Depreciation
Expense
(debit)
Accumulated
Depreciation
Balance
$
$
$
41,667
13,889
4,629
60,185
41,667
55,556
60,185
Carrying
Amount
(net book value)
$
62,500
20,833
6,944
2,315
Below residual value
($62,500 – $55,556) ×
(
2
3 years
) = $4,629
Declining-Balance Method
Depreciation expense is limited to the amount that
reduces carrying amount to the estimated residual value.
Year
1
2
3
Depreciation
Expense
(debit)
Accumulated
Depreciation
Balance
$
$
$
41,667
13,889
4,444
60,000
41,667
55,556
60,000
Carrying
Amount
(net book value)
$
62,500
20,833
6,944
2,500
Notice that accumulated depreciation, not residual value, is
included in the formula. Remember to limit depreciation
expense to the amount that reduces the carrying amount to
the estimated residual value in the final year, since an asset’s
carrying amount cannot be depreciated below residual value.
Differences in depreciation methods
overtime
Summary of Depreciation Methods
E 7-12
Change in Depreciation Estimates
Change in Depreciation Estimates
Focus Company: NVIDIA
Focus Company: NVIDIA
Focus Company: NVIDIA
$26,974
= 6.38
($3807 + 1038 + $2778 + 829)/2