Accounting ch.8

Vocabulary practice flashcards covering plant assets, depreciation methods, repairs and betterments, disposals, natural resources, depletion, intangible assets, amortization, and total asset turnover.

Plant Assets

Tangible assets used in a company's operations that have a useful life of more than one accounting period; also referred to as plant and equipment, property, plant and equipment (PP&E), or fixed assets.

Cost of a Plant Asset

All normal, reasonable, and necessary expenditures incurred to get an asset in place and ready for its intended use.

Land Improvements

Additions to land that have limited useful lives and are depreciated, including assets such as parking lots, driveways, walkways, fences, and lighting systems.

Land

The earth's surface having an indefinite (unlimited) life, with costs including purchase price, commissions, title fees, legal fees, surveying, clearing, grading, draining, and government assessments.

Lump-Sum Purchase

The acquisition of multiple plant assets together for a single price, requiring the total cost to be apportioned among assets based on their relative market or appraised values; also termed a group, bulk, or basket purchase.

Depreciation

The accounting process of allocating the cost of a plant asset to expense over its useful life; it does not measure changes in market value or physical deterioration.

Salvage Value

An estimate of an asset's value at the end of its useful life, equal to the expected proceeds from disposal less any disposal costs; also known as residual value or scrap value.

Useful Life

The length of time an asset is expected to be productive within a company's operations, which may be shorter than its total physical life; also called service life.

Inadequacy

The condition occurring when a plant asset is unable to satisfy the operational or capacity demands of a business.

Obsolescence

The state or process of an asset becoming out of date, inefficient, or no longer used.

Depreciable Cost

The total cost of an asset minus its estimated salvage value, representing the total amount to be charged as depreciation expense over the asset's useful life; also called cost to be depreciated.

Straight-Line Depreciation

A depreciation method that allocates an identical amount of expense to each period of an asset's useful life, computed as: $\text{Depreciation expense} = \frac{\text{Cost} - \text{Salvage value}}{\text{Useful life in periods}}$

Asset Book Value

The net balance sheet valuation of an asset, calculated as total acquisition cost minus accumulated depreciation: $\text{Book value} = \text{Cost} - \text{Accumulated depreciation}$

Units-of-Production Depreciation

A depreciation method that assigns a variable amount of expense to each period according to an asset's usage or output, determined by multiplying the depreciation per unit by units produced in the period.

Accelerated Depreciation Method

Any depreciation method that produces higher depreciation expense in the early years of an asset's life and lesser depreciation expense in later years.

Declining-Balance Method

An accelerated depreciation method applying a constant rate that is a multiple of the straight-line rate to the asset's beginning-of-period book value.

Double-Declining-Balance (DDB) Rate

A rate calculated as twice the straight-line depreciation rate: $\text{DDB rate} = \frac{200\%}{\text{Useful life}}$

Modified Accelerated Cost Recovery System (MACRS)

The U.S. tax system for depreciating assets to compute taxable income; it is not permitted for financial reporting because it ignores salvage value and actual useful life.

Change in an Accounting Estimate

A revision to an asset's estimated useful life or salvage value that is applied prospectively to current and future financial statements without restating prior periods.

Revenue Expenditures

Expenditures for plant assets that do not materially enhance life or productive capability, reported as expenses on the income statement in the period incurred; also called income statement expenditures.

Capital Expenditures

Expenditures for plant assets that provide economic benefits extending beyond the current accounting period, recorded by debiting an asset account; also called balance sheet expenditures.

Ordinary Repairs

Routine maintenance activities (such as cleaning, lubricating, and minor adjustments) that keep an asset in normal working condition without extending its life or productivity; accounted for as revenue expenditures.

Betterments

Capital expenditures (also known as improvements) that enhance the productivity, capability, or efficiency of an asset by adding or replacing major components.

Extraordinary Repairs

Major replacements or rehabilitation expenditures that extend the useful life of an asset beyond its initial estimate; accounted for as capital expenditures.

Natural Resources

Assets extracted from the earth that are physically consumed when used and subsequently become inventory, such as standing timber, mineral deposits, and oil and gas fields.

Depletion

The systematic allocation of the cost of natural resources to expense over the periods in which they are consumed or extracted.

Eco-Friendly Mining

Practices and activities that minimize environmental damage while promoting the fair distribution of economic benefits from resource extraction; also known as green mining.

Intangible Assets

Nonphysical operational assets that give an entity long-term legal rights, privileges, or competitive advantages, such as patents, copyrights, and trademarks.

Amortization

The process of systematically allocating the acquisition cost of an intangible asset with a limited life to expense over its useful or legal life using the straight-line method.

Patent

An exclusive legal right granted by the federal government allowing the holder to manufacture and market an invention or employ a process for a duration of $20\text{ years}$.

Copyright

An exclusive legal protection granted to publish and sell artistic, literary, or musical works during the life of the creator plus $70\text{ years}$.

Franchises and Licenses

Privileges granted by a government or private enterprise permitting an entity to operate or deliver goods and services under established contractual provisions.

Trademark (Trade Name)

A distinctive emblem, phrase, symbol, or title identifying and differentiating a product, service, or commercial enterprise from others.

Crypto Intangible Assets

A category of fungible digital assets secured by cryptography and blockchain that satisfy intangible asset criteria, do not convey claims to goods or services, and are recorded on the balance sheet at fair value.

Goodwill

The amount by which the acquisition price of an acquired business entity exceeds the fair value of its identifiable net assets; recorded only during an acquisition, tested annually for impairment, and never amortized.

Leasehold

The rights granted by a property owner (lessor) to a lessee permitting possession and use of specified property under the provisions of a lease contract.

Leasehold Improvements

Upgrades or structural modifications made to a leased property by the lessee, which are amortized over the shorter of the lease term or their estimated useful lives.

Research and Development (R&D) Costs

Expenditures made to invent new products, discover processes, or build technical knowledge; under GAAP, these must be expensed as incurred rather than capitalized.

Total Asset Turnover

A financial efficiency metric indicating the volume of net sales generated per dollar of assets invested, computed as: $\text{Total asset turnover} = \frac{\text{Net sales}}{\text{Average total assets}}$

Commercial Substance

A condition in an asset exchange wherein an entity's future operating cash flows are expected to change significantly as a result of the trade, requiring the recognition of gains or losses.