Professional Documents
Culture Documents
4
CHAPTER
4-2
Asset Introduction
Classification
Current (Short-term) Noncurrent (Long-
Assets term) Assets
Asset Introduction
Classification
Current (Short-term) Noncurrent (Long-
Assets term) Assets
Analysis of Prepaids
Two analysis issues:
(1) For reasons of expediency, noncurrent prepaids sometimes
are included among prepaid expenses classified as current--
when their magnitude is large, they warrant scrutiny
(2) Any substantial changes in prepaid expenses warrant
scrutiny
4-12
Inventories
Definitions
Inventories are goods held for sale, or goods
acquired (or in process of being readied) for
sale, as part of a company’s normal
operations
Expensing treats inventory costs like period
costs—costs are reported in the period when
incurred (Example – Office supplies)
Capitalizing treats inventory costs like product
costs—costs are capitalized as an asset and
subsequently charged against future
period(s) revenues benefiting
from their sale (Example – Direct labor)
4-13
Inventories
Inventory Costing Method
FIFO
LIFO 46%
30%
Other
Weighted 4%
Average
20%
4-14
Inventories
First-In, First-Out (FIFO)
Recent Ending
Costs Inventory
4-15
Inventories
Recent Costs of
Costs Goods Sold
Oldest Ending
Costs Inventory
4-16
Inventories
Average Cost
When a unit is sold, the
average cost of each
unit in inventory is
assigned to cost of
goods sold.
Cost of Units
Goods ÷ available on
Available for the date of
Sale sale
4-17
Inventories
Illustration of Costing Methods
Note: 30 units are sold in Year 2 for $800 each for total
Revenue of $24,000
4-18
Inventories
Illustration of Costing Methods
Inventories
LIFO Liquidations
(1) Companies maintain LIFO inventories in separate
cost pools.
Inventories
Analyzing Inventories—Restatement to LIFO
from FIFO
Three step process:
Allocation
Allocation—process of periodically expensing a deferred
cost (asset) to one or more future expected benefit periods;
determined by benefit period, salvage value, and allocation
method
Terminology
• Depreciation for tangible fixed
assets
• Amortization for intangible assets
• Depletion for natural resources
4-25
Plant Assets
Tangible
Plant Assets
Purchase All
price expenditures
needed to
Acquisition prepare the
cost asset for its
intended use
Plant Assets
Valuation Analysis
Plant Assets
Depreciation
Depreciation is the process of allocating the
cost of a plant asset to expense in the
accounting periods benefiting from its use.
(Unused) (Used)
4-30
Plant Assets
Plant Assets
Straight-Line Method
SL
4-32
Plant Assets
Double-Declining-Balance Method
Step 1:
Straight-line 100 %
depreciation rate = Useful life
Step 2:
Double-declining- Straight-line
balance rate = 2 × depreciation rate
Step 3:
Depreciation Double-declining- Beginning period
expense = balance rate × book value
Plant Assets
Intangible Assets
Intangible
Assets
Usually acquired
Useful life is
for operational
often difficult
use.
to determine.
4-35
Intangible Assets
Accounting for Intangible Assets
Record at Patents
cost, Copyrights
including Leaseholds
purchase Leasehold
price, legal Improvements
fees, and Goodwill
filing fees. Trademarks and
Trade Names
4-36
Intangible Assets
Analyzing Intangibles and Goodwill