ADM 1340 Study Guide - Final Guide: Interest Expense, Dividend Yield, Asset

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Published on 16 Apr 2013
School
University of Ottawa
Department
Administration
Course
ADM 1340
Professor
ADM1340(EXAM(REVIEW(
1!
!
Chapter(9!!!!!!Reporting!and!Analyzing!Long2Lived!Assets!
Property,(Plant,(and(Equipment(
Long!lived!assets!that:!
o Are!controlled!by!the!company!
o Have!physical!substance!
o Are!used!in!the!operation!of!a!business!
o Are!not!intended!for!sale!to!customers!
Provide!benefits!over!many!years!
o PPE!are!critical!to!a!company’s!success!because!they!determine!the!
company’s!production!capacity,!which!in!turn!affects!customer!satisfaction.!
Determining(the(Cost(of(Property,(Plant(and(Equipment(
Record!at!cost,!which!includes:!
o Purchase!price,!including!taxes!and!duties,!less!discounts!or!rebates!
o Expenditures!necessary!to!bring!asset!to!its!intended!location!and!make!it!
ready!for!its!intended!use!
Types&of&Expenditures&
Operating!expenditures!
o Benefit!only!the!current!period!
o Immediately!charged!against!revenue!as!an!expense!
Capital!expenditures!
o Capitalized!as!an!asset!
o Benefit!future!periods!
o Increases!a!company’s!investment!in!productive!activity!
!
Property,!plant,!and!equipment!are!often!subdivided!into!four!classes:!
Land%
Cost!of!land!includes!
o Purchase!price!
o Closing!costs!such!as!title!and!legal!fees!
o Additional!costs!to!prepare!land!for!its!intended!use!(less!any!proceeds!
from!salvage)!
Land!has!an!unlimited!life,!therefore!it!is!not!depreciated!
Land%Improvements%
The!costs!of!structural!additions!made!to!land!(e.g.!paving,!fencing)!
These!decline!in!service!potential!over!time!
o They!are!recorded!separately!from!land!
o Depreciated!over!their!useful!lives!
Buildings% %
All!expenditures!related!to!the!purchaseMe!or!construction!of!a!building!
When!a!building!is!purchased!such!costs!include:!
o Purchase!price!
o Closing!costs!(legal!fees,!title,!insurance)!
o Costs!required!to!make!building!ready!for!its!intended!use!
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CHAPTER!9!
2(
ADM1340(EXAM(REVIEW!
!
When!a!building!is!constructed,!its!cost!consists!of:!!
o Contract!price!!
o Architect's!fees!
o Building!permits!
o Excavation!cost!
o Interest!costs!during!construction!
Equipment%
Costs!include:!
o Purchase!price!
o Freight!charges!and!insurance!during!transit!paid!by!the!purchaser!
o Assembling!
o Installing!and!testing!
Asset&Retirement&Costs&
Cost!of!any!obligation!to!dismantle,!remove!or!restore!a!longMlived!asset!
when!it!is!retired!
These!costs!are!estimated!in!advance!and!included!as!part!of!the!cost!of!the!
asset!
Buy&or&Lease?&
Advantages!of!leasing!
o Reduced!risk!of!obsolescence!
o 100%!financing!
o Income!tax!
o “OffMbalance!sheet”!financing!
Terminology!
o !"##$%!—!owner!of!asset!for!lease!(e.g.,!landlord)!
o !"##""!—!company!leasing!asset!from!owner!(e.g.,!tenant)!
Operating!lease!
o Treated!as!rental!by!lessee!
o Periodic!payment!(dr.!rent!expense/cr.!cash)!
Finance!lease!
o Treated!as!purchase!by!lessee!(dr.!asset/cr.!liability)!
o Periodic!payment!(dr.!liability!and!interest!expense/cr.!cash)!
Depreciation(
The!cost!model!records!property,!plant,!and!equipment!at!cost!when!acquired.!
Subsequent!to!acquisition,!depreciation!is!recorded!each!period!and!the!
assets!are!carried!at!cost!less!the!accumulated!depreciation.!
Systematic!allocation!of!the!cost!of!property,!plant!and!equipment!over!the!
asset’s!useful!life!
Depreciation!is!a!process!of!cost!allocation,!not!a!process!of!determining!an!
asset’s!fair!value.!!
Does!not!use!or!provide!cash!to!replace!the!asset!
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CHAPTER!9!
ADM1340(EXAM(REVIEW(
3!
!
Factors&in&Calculating&Depreciation&&
&$#':!the!purchase!price!plus!all!necessary!costs!to!make!the!asset!ready!for!its!intended!use.!
(#")*+,+-)":!an!estimate!of!the!period!over!which!an!asset!is!expected!to!be!available!for!use.!
."#-/*0+,10+*":!an!estimate!of!the!amount!that!will!be!received!upon!disposal!of!the!asset.!
The!difference!between!a!depreciable!asset’s!cost!and!its!residual!value!is!
called!the!/"2%"3-0'-$4,05$*4'6,which!is!the!total!amount!to!be!depreciated!
over!the!useful!life.!
Depreciation&Methods&
Depreciation!is!generally!calculated!using!one!of!these!three!methods:!
1. StraightMline! !
2. DiminishingMbalance!
3. UnitsMofMproduction!
Straight8Line%Method!
Depreciation!is!constant!for!each!year!of!the!asset’s!useful!life.!
Diminishing8Balance%Method%
Produces!a!decreasing!annual!depreciation!expense!over!an!asset’s!useful!life!
o Depreciation!is!calculated!based!on!the!asset’s!carrying!amount,!which!
diminishes!each!year!as!accumulated!depreciation!increases!
Annual!depreciation!expense!is!calculated!by!multiplying!the!carrying!
amount!by!the!depreciation!rate!
o Residual!value!is!not!included!in!the!calculation!
Can!be!applied!using!different!rates!
o Depreciation!rate!=!StraightMline!rate!x!multiplier!
Units8of8Production%Method%
Useful!life!is!expressed!in!terms!of!total!units!of!production!or!activity!
expected!from!the!asset!
o Such!as!units!produced!or!machineMhours!worked!
Useful!for!factory!machinery,!vehicles,!airplanes!
!
78052+":!A!delivery!van!was!bought!on!Jan.!1,!2012!
Cost:!$33,000!
Estimated!residual!value:!$3,000!
Estimated!useful!life:!5!years/100,000km!
!
Straight8Line%Method%
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Document Summary

Determining the cost of property, plant and equipment. Reporting and analyzing long- lived assets. Adm1340 exam review 1. 2 adm1340 exam review. Cost: the purchase price plus all necessary costs to make the asset ready for its intended use. Useful life: an estimate of the period over which an asset is expected to be available for use. Depreciation is generally calculated using one of these three methods: straight- line, diminishing- balance, units- of- production. Example: a delivery van was bought on jan. 1, 2012. Estimated useful life: 5 years/100,000km. Adm1340 exam review 3. Units- of- production method: significant components, may be depreciated separately. Retirement: equipment is scrapped or discarded. Exchange: existing equipment is traded for new equipment. Disposal of property, plant, and equipment. 4 adm1340 exam review. Step 2: calculate carrying amount. Proceeds > carrying amount = gain (cr. ) Proceeds < carrying amount = loss (dr. : remove cost of asset and accumulated depreciation.

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