Accounting Exam 3

land

includes the cost of the land and all the expidentures to get it ready for intended use

costs to get land ready for use

• real estate comission and fees

• clearing, filling and leveling land

• black property taxes and other obligations

equipment

machinery used in manufacturing, computers, and other office equipment, vehicles, furnitures and fixtures

costs for equipment 

may include taxes, shipping, assembly, and any other costs to prepare asset for use 

natural resources

include oil, natural gas, timber, and salt

why is natural resources more distinguished

they are physically used up, or depleted

intangable assets

not physical and represent exclusive rights that provide benefits to owners 

intangable assets

copyrights, patenets, trademarks, franchises and goodwill 

why is research and development recorded as an expense 

difficulty determining the portion of research and development that benefits future periods 

advertising

difficult to estimate benefits for the future

recorded as an expense in the income statment in period incurred 

patents

exclusive right to manufactur a product or to use a process

copyrights

exclusive right of protection given to the creator of a published work

trademarks

renewable for indefinite number of 10 year periods

depreciation

decrease in value, or selling price of an asset

service life

the estimate use the company expects to recieve form the asset before disposing of it

residual value

the amount the company expects to recieve from selling the asset at the end of its service life

depreciation method

the pattern in which the asset’s depreciable cost (original cost - residual value) is allocated over time

three common depreciation methods

1. straight-line 

2. declining-balance

3. activity-based 

double-declining balance

depreciation expense will be higher in earlier years and less in later years

amortization

allocating cost of intangible assets to expense is

expenses

repairs and maintenance equal

capital improvement

increase the asset account

gain

if we dispose of an asset for more than its book value, we report a

loss

if we dispose of an asset for less than its book value, we report a

activited-based depreciation formula

depreciable cost/ total unites expected to be produced, then multiply units of activity per year by depreciation rate per unit

straight-line depreciation formula

assets cost-residual value/service life

inventory

includes items a company intends to sell to customers in the ordinary course of business, reported as current asset in balance sheet

cost of goods sold

is an expense reported in the income statement and represents costs of inventory sold

gross profit

revenue - COGS=

net income

revenues - expenses

operating income

gross profit - operating expenses

income before income taxes

operating income + nonoperating revenues - nonoperating expenses

FIFO

assumes first units purchased are first units sold

LIFO

assumes last units purchased are first ones sold

weighted average cost

assumes each unit of inventory has a cost equal to the weighted-average unit cost of all inventory items 

weighted average cost formula 

cost of goods available for sale/ number of units available for sale 

prepetual inventory system

• maintains a continual record of inventory on hand and inventory purchased and sold

periodic inventory system

does not continually record inventory amounts, calculates balance of inventory at the end of period based on physical count

inventory turnover ratio

shows the number of times the firms sells its average inventory balance during a reporting period 

inventory turnover ratio defenition

cost of goods sold/ average inventory

average days of inventory

indicateds the approximate number of days the average inventory is held

average days in inventory formula

365/ inventory turnover ratio