Accounting Final Exam Review Chapters 9 & 10

Plant Assets

Tangible assets expected to benefit future periods, actively used in operations, and also called Property, Plant, & Equipment.

Cost Principle

The requirement that assets be valued at all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use.

Machinery and Equipment Costs

Includes the purchase price, installing, assembling, testing, insurance while in transit, taxes, and transportation charges.

Building Costs

Includes the cost of purchase or construction, brokerage fees, taxes, title fees, and attorney fees.

Land Improvements

Assets such as parking lots, driveways, fences, walks, shrubs, and lighting systems that are depreciated over their useful life.

Land

A plant asset that is not depreciable; its cost includes purchase price, real estate commissions, title insurance premiums, property taxes, surveying fees, and title search and transfer fees.

Lump-Sum Purchase

A combined purchase of items like land and buildings where the total cost is allocated based on their relative fair market values.

Depreciation

The process of allocating the cost of a plant asset to expense in the accounting periods benefiting from its use.

Factors in Computing Depreciation

The three amounts required for each asset: $Cost$, $Salvage Value$, and $Useful Life$.

Salvage Value

The predicted value of a plant asset at the end of its useful life.

Useful Life

The length of time a plant asset is expected to be used in a company's operations.

Straight-Line Method

A depreciation method that calculates expense as: $rac{ ext{Cost} - ext{Salvage value}}{ ext{Useful life in periods}}$.

Units-of-Production Method

A method that allocates depreciation based on asset use, calculated by finding depreciation per unit $rac{ ext{Cost} - ext{Salvage Value}}{ ext{Total Units of Production}}$ and multiplying by number of units produced in the period.

Double-Declining-Balance Method

An accelerated depreciation method that uses a rate equal to $2 imes ext{Straight-line rate}$ applied to the beginning-period book value.

Book Value

The value of an asset calculated as: $ext{Cost} - ext{Accumulated Depreciation}$.

Partial-Year Depreciation

The calculation of depreciation for a fraction of the year when a plant asset is purchased or sold during an accounting period.

Changes in Estimates for Depreciation

The process of revising depreciation for current and future periods when new information indicates original estimates for salvage value or useful life were inaccurate.

Asset Disposal

The process of removing a plant asset from operations by discarding it or selling it, requiring depreciation to be updated to the date of disposal.

Betterments

Also called improvements, these are expenditures that make a plant asset more efficient or productive.

Extraordinary Repairs

Expenditures extending the asset’s useful life beyond its original estimate.

Total Asset Turnover

A measure of a company’s efficiency in using its assets, calculated as: $rac{ ext{Net sales}}{ ext{Average total assets}}$.

Accounts Receivable

Amounts owed by customers from credit sales for which payment is required; a separate account must be maintained for each customer to track purchases, payments, and balances due.

Bad Debts

Uncollectible amounts from customers who do not pay their accounts.

Direct Write-Off Method

A method of accounting for bad debts that records the loss from an uncollectible account at the time it is determined to be uncollectible; it does not usually best match sales and expenses.

Expense Recognition Principle

Requires expenses to be reported in the same accounting period as the sales they helped produce.

Materiality Constraint

States that an amount can be ignored if its effect on the financial statements is unimportant to users’ business decisions.

Allowance Method

A method of accounting for bad debts that matches estimated losses from uncollectible accounts against the related sales and reports accounts receivable at their estimated realizable value.

Realizable Value

The expected amount of cash to be collected; for accounts receivable, it is calculated as total accounts receivable minus the allowance for doubtful accounts.

Percent of Sales Method

An income statement approach to estimating bad debts where Bad Debts Expense is computed as a percentage of credit sales for the period.

Percent of Receivables Method

A balance sheet approach where the desired balance for the Allowance for Doubtful Accounts is calculated as ext{Year-end Accounts Receivable} imes ext{Bad Debt %}.

Aging of Receivables Method

A method of estimating bad debts by classifying each receivable by how long it is past due and applying specific uncollectible percentages to each age group.

Promissory Note

A written promise to pay a specified amount of money, usually with interest, either on demand or at a stated future date.

Maturity Date

The day a note, including both principal and interest, must be repaid.

Banker's Rule

A convention used for interest computation that bases a year on $360$ days when the note period is expressed in days.

Interest Formula

The calculation for interest earned on a note, expressed as ext{Principal} imes ext{Annual Interest Rate} imes rac{ ext{Time}}{360} when based on the banker's rule.

Honored Note

A note that is paid in full (principal and interest) by the maker on its maturity date.

Dishonored Note

A note where the maker fails to pay the principal and interest at maturity; this does not relieve the maker of the obligation to pay.

Accounts Receivable Turnover

A ratio used to evaluate management efficiency in granting credit, calculated as $rac{ ext{Net Sales}}{ ext{Average Accounts Receivable, net}}$.

Installment Sales

Credit sales for which payment is required in periodic amounts over an extended period, usually involving interest charges.