Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
167 Cards in this Set
- Front
- Back
Assets are valued on the basis of their original costs, which includes
|
the purchase price and all expenditures necessary to bring the asset to its desired condition and location for use
|
|
People must pay all back taxes (or mortgages, or other types of obligations) before they
|
have a clear title and can use the property
|
|
________ is not depreciated
|
land
|
|
True or false: land improvements are capitalized and depreciated
|
true
|
|
expenditures that produce future benefits should be
|
Capitalized
|
|
Expenditures that produce benefits only in the current period should be
|
expensed
|
|
When natural resources are expected to provide long-term benefits, they are classified as
|
plant, property, and equipment
|
|
__________ are the amounts paid to acquire the rights to explore for undiscovered natural resources or to extract proven resources
|
Acquisition costs
|
|
________ are expenditures when searching for natural resources
|
Exploration costs
|
|
____________ are incurred after the resource has been discovered but before production begins
|
Development costs
|
|
___________ are costs to restore land or other property to its original condition after extraction—it’s a type of asset retirement obligation
|
Restoration costs
|
|
Asset retirement obligation is a
|
liability
|
|
When you retire an asset, you must pay additional costs (like teardown costs), which are technically incurred
|
before the asset is retired
|
|
_________ are intellectual property (exclusive rights that provide benefits to the owner)—they lack physical substance and the extent and timing of their future benefits is highly uncertain. Includes trademarks, patents, copyrights, franchises, and goodwill
|
Intangible assets
|
|
_________ is an exclusive right to manufacture a product or use a process for 20 years. It can be developed internally, in which case the R & D costs are expensed and legal and filing fees are capitalized.
|
A patent
|
|
__________ is an exclusive right of protection given to a work’s creator for the life of the creators plus 70 years. R & D costs are expensed and legal and filing fees are capitalized
|
A copyright
|
|
______________ is an exclusive right to display a word, slogan, symbol, or emblem that distinctively identified a company, product, or service. Lifetime is 10 years with indefinite renewals—thus they have indefinite lives
|
A trademark—or tradename
|
|
___________ is a contractual agreement under which the franchisor grants the franchisee the exclusive right to use the franchisor’s trademark or tradename and may include product and formula rights, within a geographical area, for a specified period of time
|
A franchise
|
|
____________ is a unique intangible asset that only appears on the balance sheet when purchased in connection with the acquisition of another company. It’s a residual asset—the amount left over after other assets are identified and valued
|
Goodwill
|
|
While goodwill can be internally developed, the costs of doing so are expensed—_____________ overshadows relevance
|
faithful representation
|
|
_________is not amortized
|
Goodwill
|
|
An intangible asset must be recognized as an asset apart from goodwill if it arises from
|
contractual or legal rights or is separable
|
|
When buying a business, part of the purchase price goes toward net ______________, part covers identifiable intangible assets, and the rest is goodwill
|
tangible assets
|
|
Assets acquired in noncash transactions are valued at the fair value of the assets given or received, whichever is more clearly evident (example is ________________)
|
an issuance of equity securities
|
|
Donated assets are usually given as enticements to do something that benefits the donor. They are valued at their __________, and ________is credited
|
fair value, revenue
|
|
Retirements (abandonments) are accounted for by recording a loss for the ______________
|
remaining book value of the asset
|
|
When assets are going to be disposed of by sale, they are classified as held for sale and measured at the lower of
|
book value or fair value less cost to sell
|
|
Goodwill = purchase price - _______, which equals _________ - _________
|
fair value, FV assets - FV liabilities
|
|
FV of asset given - cash received =
or FV of asset given + cash given = |
FV of asset received
|
|
FV new asset - BV old asset =
|
gain (loss)
|
|
The basic principle used for nonmonetary exchanges is to value the asset(s) received based on the fair value of the
|
asset(s) given up
|
|
______________, valuation of the asset(s) received is based on the book value of the asset(s) given up plus (or minus) any cash given or received
|
When fair value is not determinable
|
|
The amount of cash given or received has no effect on
|
the loss or gain recognized
|
|
the two difficulties in determining costs of self-constructed assets are
|
determining overhead allocation and determining treatment of interest
|
|
Overhead can be allocated to self-constructed assets either ________ or ___________
|
incrementally, using the full-cost approach (a portion just like a regular project would receive)
|
|
_________ is the more common overhead allocation approach
|
Full-cost approach
|
|
Discrete projects are (a) ___________ and (b) assets constructed as discrete projects for sale or lease
|
assets built for a company’s own use
|
|
Interest is capitalized for ____________ during the construction period
|
discrete projects
|
|
The interest capitalization period begins __________________ as long as interest costs are actually being incurred
|
when construction begins and the first expenditure is made
|
|
We only __________ during construction that could have been avoided if the asset wasn’t made
|
capitalize interest costs
|
|
We determine average accumulated expenditures by
|
time-weighting individual expenditures made during the period
|
|
Both the total amount of interest costs incurred and the amount that has been capitalized should be
|
disclosed
|
|
__________ is planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service or process or technique or in bringing about a significant improvement to an existing product or process
|
Research
|
|
_________ is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use
|
Development
|
|
Costs that occur after commercial production begins would be either
|
expensed or included in cost of inventory
|
|
Expensing all R & D costs means that
|
assets are understated and current expenses are overstated
|
|
Total R & D expense during the period must be
|
disclosed
|
|
Depreciation is a process of
|
cost allocation, not valuation
|
|
Depreciation, depletion, and amortization are processes that attempt to satisfy
|
the matching principle
|
|
Depreciation, depletion, and amortization for an asset used to manufacture a product are included in ____________ and expensed if not used in production
|
the cost of inventory
|
|
____________ is the estimated use that the company expects to receive from the asset
|
Service life
|
|
Service life, or useful life, can be expressed in
|
units of time or in units of activity
|
|
____________ provides the upper bound for service life of tangible, long-lived assets
|
Physical life
|
|
Expected obsolescence can shorten service life below
|
physical life
|
|
_______ is the value of the usefulness that is expected to be consumed
|
Allocation base
|
|
_____________ is the difference between the cost of the asset and its anticipated residual or salvage value
|
Allocation base
|
|
Estimating residual value for many assets can be very difficult due to the uncertainty about the future, and residual values are often immaterial. Thus,
|
many companies simply assume a residual value of zero
|
|
_________ usually aren’t disclosed
|
Residual values
|
|
_____________ is the pattern in which the asset's usefulness is expected to be consumed
|
Allocation method
|
|
Allocation method used should be
|
systematic and rational and correspond to the pattern of asset use
|
|
_________________ method multiplies depreciable base by a declining fraction and has no logical foundation other than the fact that it accomplishes the objective of accelerating depreciation in a systematic manner
|
The sum-of-the-years’-digits (SYD)
|
|
Declining balance depreciation methods multiply ______________ by an annual rate that is a multiple of the straight-line rate
|
beginning-of-year book value, not depreciable base
|
|
It’s not uncommon for a company to switch from _____________ approximately halfway through an asset’s useful life as part of the company’s planned depreciation approach
|
accelerated to straight-line
|
|
Activity-based depreciation methods estimate service life in terms of some measure of productivity—either ___________
|
input or output
|
|
Under units of production, average depreciation rate per unit is computed by dividing __________ by the number of units expected to be produced
|
depreciable base
|
|
Under units of production, the last year’s depreciation expense is a ________ that reduces book value to the expected residual value
|
plug value
|
|
Activity-based methods are theoretically superior to _________ but often are impractical to apply in practice
|
time-based methods
|
|
A company ________ use the same depreciation method for both financial reporting and income tax purposes
|
does not have to
|
|
__________ defines the collection as depreciable assets that share similar service lives and other attributes
|
Group depreciation method
|
|
_______ is used when assets are physically dissimilar but are aggregated anyway to gain the convenience of a collective depreciation calculation
|
Composite depreciation method
|
|
Group/composite approaches involve applying a ___________ based on the average service lives of the assets in the group or composite
|
single straight-line rate
|
|
Once the group or composite rate and the average service life are determined, they normally are continued despite
|
the addition and disposition of individual assets
|
|
_________ is recorded when a group or composite asset is retired or sold
|
No gain or loss
|
|
Activity-based units-of-production method is widely used to calculate periodic depletion, so service life is
|
the estimated amount of natural resources to be extracted
|
|
The expected residual value of an intangible is usually
|
zero
|
|
Most companies use the ________ to amortize their intangibles
|
straight-line method
|
|
For intangibles in the manufacture of a product, amortization is a ________ and is included in the cost of inventory
|
product cost
|
|
Trademarks and tradenames often are considered to have
|
indefinite useful live
|
|
Partial year depreciation presents a problem only when
|
time-based methods are used
|
|
Under the ___________, we record on half of a full year’s depreciation in the year of acquisition and another half year in the year of disposal
|
half-year convention
|
|
A change in estimate should be treated
|
prospectively
|
|
True or false: A disclosure note should describe the effect of a change in estimate on income before extraordinary items, net income, and related pershare amounts for the current period
|
true
|
|
_____________ are accounted for the same way as a change in accounting estimate but are technically a change in estimate as a result of changing an accounting principle and therefore requires a clear justification as to why the new method is preferable
|
Changes in depreciation, amortization, or depletion methods
|
|
If material error is discovered in an accounting period subsequent to the period in which the error is made, it’s treated
|
retrospectively, meaning that financial statements are restated, account balances are corrected via prior period adjustments, and the nature of the error and its effects on income are disclosed
|
|
An asset held for use should be written down if there has been a ____________ impairment of value
|
significant
|
|
Property, plant, and equip and finite-life intangibles are tested for impairment only if circumstances indicate book value may not be recoverable:
|
• A significant decrease in price
• A significant adverse change in how the asset is being used or in its physical condition • A significant adverse change in legal factors or in the business climate • An accumulation of costs significantly higher than the amount originally expected for the acquisition or construction of an asset • A current-period loss combined with a history of losses or a projection of continuing losses associated with the asset • A realization that the asset will be disposed of significantly before the end of its estimated useful life |
|
Via the recovery test, an impairment loss is only required when the
|
undiscounted sum of future cash flows is less than book value
|
|
Via the measurement step when recoverability fails, the impairment loss is the
|
excess of book value over fair value
|
|
Fair value equals
|
discounted cash flows (the present value of future cash flows)
|
|
Impairment losses should be
|
disclosed
|
|
Intangible assets with indefinite lives should be tested for impairment
|
at least annually
|
|
A goodwill impairment loss is indicated when the fair value of the reporting unit (company) is less than its
|
book value
|
|
A goodwill impairment loss is measured as the excess of the
|
book value of the goodwill over goodwill's implied fair value
|
|
The implied fair value of goodwill is a residual amount measured by subtracting
|
the fair value of all identifiable net assets from the unit’s fair value (its purchase price)
|
|
For assets held for sale, book value should not exceed
|
fair value less cost to sell
|
|
If future net cash flows are underestimated, fair value is understated. Ultimately, this makes impairment loss ________, _______current income, and _______ future income because depreciation/amortization/etc are understated
|
bigger, lowers, raises
|
|
Most companies do not capitalize any expenditure unless it exceeds
|
a predetermined amount that is considered material
|
|
Expenditures and repairs simply maintain current benefits and
|
are expensed
|
|
_________ involve adding a new major component to an existing asset and should be capitalized
|
Additions
|
|
_________ involve replacement of a component and are capitalized. There are three ways to record costs of improvements:
1. Substitution—dispose of old component and acquire a new one 2. Capitalization of new cost—add cost minus salvage of component to asset account. Only appropriate if the value of old component was immaterial after being depreciated 3. Reduction of accumulated depreciation |
Improvements
|
|
_________ do not add, replace, or improve an asset but rather create a new capability and should be capitalized if they clearly increase future benefits
|
Rearrangements
|
|
Costs of successfully defending an intangible right should be __________
|
captalized
|
|
Double decline balance method uses
|
the current book value
|
|
A note payable and a note receivable are
|
two sides of the same coin
|
|
___ is the effective interest rate times the amount of the debt outstanding during the interest period
|
Periodic interest
|
|
___ divides a large liability into many smaller liabilities
|
A bond issue
|
|
Corporations issuing bonds are obligated to repay
|
a stated amount at a specified maturity date and periodic interest between the issue date and maturity
|
|
___ describes the specific promises made to bondholders
|
A bond indenture
|
|
The present value of a liability is the PV of its related cash flows (principal and/or interest payments), discounted at the
|
effective rate of interest at issuance
|
|
The most common form of corporate debt is
|
bonds
|
|
Principal, __, ___, or ___ are all synonymous terms
|
par value, face amount, maturity value
|
|
Periodic interest rate is also referred to as ___, ___, or __
|
stated rate, coupon rate, nominal rate
|
|
A bond indenture is held by a
|
trustee
|
|
Most corporate bonds are __ bonds
|
debenture
|
|
A debenture bond is secured only by
|
the full faith and credit of the issuing corporation with no assets pledged
|
|
Investors in debentures have the same standing as ___ with regards to the company’s liquidation; however, a ___ is not entitled to receive any liquidation payments until the claims of other specified debt issues are satisfied
|
other general creditors, subordinated debenture
|
|
__ bonds are backed by real estate and typically commands a lower interest rate
|
Mortgage
|
|
Most corporate bonds are __ bonds, meaning interest checks are mailed directly to the bond’s owner
|
registered
|
|
Coupon, or bearer, bonds were common before ___ bonds
|
registered
|
|
Most corporate bonds are ___ (or ___), which allows companies to avoid being stuck paying interest rates higher than the market rate
|
callable, redeemable
|
|
___ are pre-specified and often exceeds the bond’s face amount
|
Call prices
|
|
Often, calling bonds is mandatory, requiring sinking fund redemptions and earning these bonds the name
|
sinking fund debentures
|
|
___ are retired in installments during all or part of the life of the issue
|
Serial bonds
|
|
Convertible bonds are retired as a consequence of
|
bondholders deciding to convert them into a share of stock
|
|
Most bonds are issued on the day they are dated, but if there is a delay, ___ is added to the bond’s price
|
interest that has accrued since the day they are dated
|
|
Bonds that sell for more than their face amount (which happens when stated interest rate is higher than market rate) are sold at
|
a premium
|
|
Bonds that sell for less than their face amount (which happens when stated interest rate is lower than market rate) are sold at
|
a discount
|
|
The lower the perceived riskiness of the corporation issuing the bonds, the ___ the price those bonds will command
|
higher
|
|
A bond issue will be priced by the marketplace to yield the ___ for securities of similar risk and maturity
|
market rate of interest
|
|
A bond’s price will be
|
the present value of the periodic cash interest payments (face amount x stated rate) plus the present value of the principal payable at maturity, both discounted at the market rate
|
|
The ___ on debt is the market rate of interest multiplied by the outstanding balance of the debt
|
effective interest
|
|
The difference between the effective interest and the interest paid ___ the existing liability
|
increases
|
|
A ___ pays no interest but rather offers a deep discount from the face amount
|
zero-coupon bond
|
|
We accrue interest expense or revenue each period at the ___ rate regardless of how much cash is actually paid
|
effective
|
|
An advantage of issuing zero-coupon bonds is that ___ but has no related cash outflow until the bonds mature; conversely, investors must ___ although they have not yet received it
|
the corporation can deduct for tax purposes the annual interest expense, report interest earned
|
|
The outstanding amount of debt each period is the
|
present value of the remaining cash flows, discounted at the original rate
|
|
Since more cash is paid for a premium each period than the effective interest, the debt outstanding is __ by the overpayment
|
reduced
|
|
Whether bonds are issued at a premium or discount, the outstanding balance becomes __ at maturity
|
zero
|
|
Any interest accrued since the last interest date must be recorded by an adjusting entry
|
prior to preparing the financial statements
|
|
By the ___, interest (expense and revenue) is a plug figure, resulting from calculating the amount of discount reduction
|
straight-line method
|
|
Determining interest by allocating the discount or premium on a straight-line basis is a practical expediency permitted in some situations by the
|
materiality concept
|
|
Corporations usually sell an entire issue of bonds to an ___ rather than the public
|
underwriter
|
|
If an issuing company sells their debt securities directly to a single investor, this is called
|
private placement
|
|
Costs of issuing debt securities are recorded as a debit to an asset account (__) and amortized to __ over the term to maturity
|
debt issue costs, expense
|
|
The premium or discount is unaffected by debt issue costs because
|
they are recorded in a separate account
|
|
The interest rate stated in a __ is likely to be equal to the market rate because the rate usually is negotiated at the time of the loan; thus discounts and premiums are less likely for
|
note, notes than on bonds
|
|
A basic concept of accounting is
|
substance over form
|
|
The __ rate of interest is the rate implicit in the agreement
|
implicit
|
|
Deciding what the appropriate interest rate should be is called __ an interest rate
|
imputing
|
|
The effective interest (expense to issuer, revenue to investor) is calculated each period as the __ times the ___
|
effective rate, amount of the debt outstanding during the interest period
|
|
When less cash is paid each period than the effective interest, the unpaid difference ___ the outstanding balance (carrying value) of the note
|
increases
|
|
___ are equal amounts each period; these payments include both an amount that represents interest and an amount that represents a reduction of the outstanding balance
|
Installment payments
|
|
___ is required of the fair value of bonds, notes, and other financial instruments
|
Supplemental disclosure
|
|
Borrowing is __ activity, lending is ___ activity, and paying or receiving interest is ___ activity
|
a financing, an investing, an operating
|
|
Long-term debt is usually reported in the balance sheet as
|
a single amount, net of any discount or increased by any premium
|
|
Any portion of debt to be paid or received during the upcoming year should be reported as
|
a current amount
|
|
Debt paid in installments has an outstanding balance of __ at its maturity date
|
zero
|
|
Any difference between the outstanding debt and the amount paid to retire that debt represents
|
either a gain or a loss
|
|
Even when bonds are not callable, the issuing company can retire bonds early by
|
purchasing them on the open market
|
|
When debt of any type is retired prior to its scheduled maturity date, the transaction is referred to as
|
extinguishment of debt
|
|
Convertible bonds can be exchanged for ___ at the option of the investor
|
stock
|
|
Reasons for ___ include: to sell the bonds at a higher price and get a lower effective interest cost, to use as a medium of exchange for mergers and acquisitions, and to enable smaller firms or debt-heavy companies to obtain access to the bond market
|
issuing convertible bonds
|
|
Conversion is
|
attractive to investors
|
|
Convertible bonds have features of both
|
debt and equity
|
|
Because of the inseparability of their debt and equity features, the entire issue price of convertible bonds is recorded as ___, as if they are nonconvertible bonds
|
debt
|
|
The value of the conversion feature is
|
not recorded separately
|
|
Any additional consideration provided to induce conversion of convertible debt is recorded as
|
an expense of the period
|