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PPE
tangible long-lived resources
produces goods/services for customers, earns revenues, etc.
not intended to be sold
PPE at historical cost
purchase price,including non-refundables taxes and duties, less any discounts/rebates
Expenditures needed to bring the asset to its location
Estimate of future expenditures related to removing/etc the asset at the end of its life
operating expenditures
costs benefiting current period, maintains asset in normal operating condition
capital expenditures
costs benefiting future periods, includes costs increasing the life of an asset. doesn’t occur frequently
asset retirement costs
amount added to cost of a long lived asset relating to dismantling/etc an asset when its retired
cost determined in land (building sites)
includes all costs like the cash purchase price, closing costs such as survey, title search, and legal fees, costs for preparing the land like clearing, draining, excavating, and grading, and costs to demolish unwanted buildings
cost determined in land improvements
____________ are structural additions to a property, and decline in service potential over time and require maintenance and eventual replacement
cost determined in buildings
when a _________ is bought, its cost includes the purchase price, any costs to finalize the transaction, like legal fees, and any costs to make it ready. for new ______, it consist of contract price and payments for arch. fees, permits, and excavation costs
cost determined in equipment
things like computer hardware, office equipment, vehicles, furniture, machinery, and etc. the cost includes the purchase price and all costs necessary to get ________ ready, as well as expenditures to assemble and install it
recording recurring expenditures as operating expenditures
the frequency of the cost—one time or recurring, and the benefit period—the life of the asset/one year
leasing
a party that owns an asset (lessor) agrees to allow another party (lessee) to rent the asset for an agreed period at a price
benefits of leasing
little/no down payment, reduced risk of obsolescence, income tax advantages
right-of-use asset
a leased asset recorded as property, plant, and equipment because the right to use the asset has been obtained by the lessee, because the lease extends one year
capital lease
benefits and risks of ownership transferred to lessee
operating lease
benefits and risks of ownership are not transferred; they record each lease payment as lease expense on the income statement.
leasehold improvements
belong to the lessor (the landlord) at the end of the lease because the benefits of these improvements end when the lease expires for the lessee. The lessee will rather depreciate improvements over the shorter of the remaining life, or the useful life of the improvements
cost model
records PPE at cost when required
depreciation
begins when an asset can be used, and ends when it is derecognized. accountants are allocating the cost of the asset to depreciation expense over its useful life, matching it with the expected use of the assets future economic benefits.
residual value
an estimate of the amount a company will obtain from the disposal of an asset at the end of its useful life
factors affecting depreciation
cost, useful life, and residual value
depreciable amount
cost of a depreciable asset less its residual value
straight line method
The depreciation expense is the same each year, and the carrying amount should equal the estimated residual value.
diminishing-balance method
Calculated using carrying amount, which diminishes each year. Does not use residual value when calculating depreciation, and it must ensure the asset’s carrying amount does not fall below residual value.
units-of-production method
Expressing the useful life using a measure of output, rather the year its expected to be used. This is useful for long-lived asset that have varying levels of productivity for periods.
revising depreciation
When estimates in an asset’s useful life changes, management will need to _______ the amount of _______ the company will record. This only affects the subsequent years, it does not require adjustments recorded in the past.
impairments
After a company requires a PPE, its carrying amount is rarely equal to its fair value. When an asset’s fair value is less than its carrying amount, they must record ________
natural resources
__________ do not retain physical properties as consumed over time, so they are depleted, and it’s common to use the units-of-production method as production levels vary
significant components
when an item of PPE includes individual parts that have different useful lives, we need to account it separately. this allows companies to depreciate each part over its useful life.
depreciation and income tax
When preparing a tax return and determining taxable income, companies can’t deduct the depreciation expense, they must deduct the CCA. Usually, the diminishing balance method is used here.
revaluation model
the carrying amount of PPE is adjusted regularly to reflect its fair value. Companies don’t have to revalue assets each year as long as the reported carrying amount is not materially different from the asset’s fair value
sales of PPE
update depreciation
calculate carrying amount
calculate gain or loss
record disposal
retirement of PPE
when a company no longer needs an asset/can’t sell it. the carrying amount equals residual value because the equipment is fully depreciated. The carrying amount, if sold, will equal the proceeds, and no gain/loss on disposal.
intangible assets
can be separated from the company and sold, licensed, or rented, and are based on contractual or legal rights. they are also recorded at cost.
finite life intangible assets
systematically allocate its cost to an expense over its useful life (amortization)
infinite life intangible assets
these assets are not amortized like land
when are annual impairment tests done?
under IFRS, even with no indicators of impairment
under which GAAP can companies reverse impairment losses?
under IFRS
under which GAAP can companies not reverse impairment losses?
under ASPE
types of intangible assets with finite lives
patents, copyrights, research and development costs
development phase begin once this criteria is met
product is feasible
company intends to complete product development
company can sell/use product
company has resource to complete it
company can measure the costs incurred on it
a market exists that can provide future economic benefits for the product
types of intangible assets with infinite lives
trademarks, franchises and licences
goodwill
Asset representing future economic benefits arising from the purchase of a business not relating other assets, but to benefits provided by the business as a whole. Represents the value of favourable attributes including good management, location, employees, etc.
type of life goodwill has
infinite life, so its not amortized; there can be impairment tests, but it cannot be reversed.
statement presentation; balance sheet
under IFRS, companies must show additions, disposals, depreciation or amortization methods and useful lives or rates, impairment losses, and reversals of impairment losses. ASPE does not need to do this
statement presentation; income statement
companies present depreciation and amortization expense, gains and losses on disposal, and impairment losses in operating expenses.
statement presentation; cash flows
The reports of purchases and sales of non-current assets are in the investing activities
return on assets
Measures profitability; indicates the amount of net income generated by each dollar invested in assets
asset turnover
Indicates how efficiently a company uses its assets, by how many dollars of sales are generated by each dollar invested in assets. higher = more efficient
profit margin
How effective a company turns its sales into income, by how much net income is generated by each dollar of sales
how should a company increase its return on assets?
increase margin it generate from each dollar of goods it sells, and increase volume of goods or services it sells
liabilities
present obligations to transfer resources because of past transactions. these are paid by transferring assets like cash/inventory, or providing services
current liabilities
liabilities paid or settled within one year or one operating cycle
non-current liabilities
liabilities that will be settled after a year
financial liability
companies settling most liabilities with cash payments
deferred revenue
not a financial liability, because this is settled through providing goods/services in the future rather than cash payment
examples of current liabilities
bank indebtedness from operating lines of credit, accounts payable, refund liabilities, liabilities related to income tax and sales and property taxes, interest, payroll deductions
certain liabilities
have a known payee, due date, and amount payable
uncertain liabilities
aka provisions or contingent liabilities, variability regarding payee, amount, and timing of payment
sales taxes
GST, PST, HST, etc; when a sale occurs, the retailer collects sales tax from the customer and periodicially sends (remits) sales tax owing to the collecting authorities. it depends on the nature of the payment if paid in advance
wages
based on hourly rate
salaries
fixed annual amount; do not usually add overtime pay
gross pay
total amount of salaries or wages earned by an employee
payroll deductions
deductions from gross pay to determine paycheque amount
net pay
gross pay less any payroll deductions
employee benefits expense
payments made by an employer for its share of CPP, EI, pension, insurance, health, and other benefits paid on behalf of its employees
examples of certain liabilities
accounts payable, sales tax payable, salaries payable, and other
provisions
liabilities of uncertain timing or amount. they can only record a liability when a present obligation exists, an outflow of resources to settle it is likely, and the amount can be estimated
examples of provisions
refund liabilities, product warranties, damages from lawsuits, and fines levied by regulatory bodies
contingent liabilities
exisiting/possible obligations arising from past event. this is dependent whether some future event occurs that will confirm either its existence, amount payable, or both.
principal
original amount of a loan
operating line of credit
pre-arranged agreement to borrow money at a bank, up to an agreed amount. the bank has right to request the company to pay back immediately, or give them a notice to a repayment date.
floating/variable interest rate
varies in relation to the bank’s prime borrowing rate
prime rate
interest rate that banks charge their best customers
overdraft position
when funds are drawn on the line of credit, the bank account gets a negative balance. this credit cash balance is reported as bank indebtedness
collateral
assets pledged as security for payment of a debt
notes payable
promise to repay a specific amount of principal on a maturity date. they bear interest at a fixed interest rate. interest expense is incurred on a note over time
examples of non-current liabilities
liabilities requiring instalment payments, such as bank loans payable and mortgages payable. bonds payable, lease liabilities, deferred income taxes, and pension liabilities, etc.
characteristics of liabilities with instalment payments
no repayment flexibility, have fixed interest rates, and interest rates on mortgages are lower than bank loan interest rates because security for a mortgage cannot be moved, and the value over time will decrease.
instalments
periodic payments upon receiving the loan, consisting of interest and principal repayment (difference between total instalment payment and interest portion)
advantages of debt financing
easier to obtain than equity financing, avoids dilution of ownership, borrowing funds allow companies to grow faster, and although interest expense is incurred on debt, it is tax deductible
disadvantages of debt financing
must pay back principal and interest on certain due dates, must earn a return on debt exceeding interest rate, and a company must pledge security for debt financing, or they can be seized by the lender
liquidity ratios
measure a company’s short term ability to pay its obligations and meet unexpected needs for cash within next year
solvency ratios
measures ability to repay its long-term debt and survive for a long time
debt to total assets
a company using debt to finance its assets, dividing total liabilities by total assets
equity ratio
divide total liabilities by total shareholders equity. if this ratio exceeds 100% the company is using debt financing more than equity financing, indicating high level of leverage and risk
times interest earned
shows ability to meet interest payments as they come due. the higher this ratio, the better a company can pay its interest charges. divide sum of net income, interest expense, and income tax expense by interest expense. higher ratio is better
credit ratings
provide opinions on a company’s ability to make timely payments of principal and interest on short and long term debt.
bonds
like long-term notes payable, with principal repayment not due until bonds mature. when issuing this, it provides a promise to the lender to repay an amount of money, the face value, at a fixed maturity.
coupon interest rate
periodic interest payments at a fixed interest rate
market interest rate
rate investors demand for lending funds to a corporation
discount
difference between a bond’s face value and issue price when its sold for less than its face value; occurs when market interest rate > coupon interest rate
premium
difference between issue price and face value of a bond when the bond is sold for more than its face value; occurs when market interest rate < coupon interest rate
bonds issued at face value
issued by companies at a price investors consider fair, so they pay full face value of the bonds. they’re happy with the interest payments they’ll receive over the bond’s term and will get the full face value back when the bonds mature. this is when coupon interest rates match the market interest rate.
bonds issued at discount
when market interest rates exceed 5%, companies issue bonds at ______, as investors pay less than the face value as they demand compensation for the lower coupon rate. despite paying less, investors still receive interest payments, and at maturity, get full face value, resulting in a return including both discount and interest payments
bonds issued at premium
when market interest rates are below 5%, companies issue bonds at ______, where investors pay more than face value to receive interest payments higher than market rate. despite paying more, they only get face value maturity, reducing their return
effective-interest method
amortizing a bond discount or premium resulting in a periodic interest expense that equals constant percentage (market or effective interest rate) of the bonds carrying amount. multiply the carrying amount of the bonds at the beginning of the period by the market interest rate
carrying amount of a bond
face value less any unamortized discount plus unamortized premium (balance in bonds payable)
amount of discount or premium amortized in a period
difference between interest expense and interest paid
accounting for bond retirements
either when they mature, or when the issuing corporation purchases them on the open market before matured.
redeemable (callable) bonds
bonds that can be retired at a specific price before maturity at the option of the issuer
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