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Financial Accounting 1 Week 4 Summary
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Financial Accounting 1 Week 4 Summary including readings
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Week 4 :Preparation: Chap 9: Plant Assets, Natural Resources, and
Intangible Assets.
Plant assets: resources that have three characteristics:
- Physical substance (definite size and shape)
- Used in the operations of a business
- Not intended for sale to customers.
Also called property, plant, and equipment; plant and equipment; fixed assets.
Except for lands: decline in service potential over their useful life. They play a key
role, so they are kept in good operating conditions.
The historical cost principle requires them to be recorded at cost = all expenditure
necessary to acquire it and make it ready for its intended use.
Major classes:
- Land: cost includes the cash purchase price, closing cost such as title and
attorney’s fees, real estate brokers’ commissions, accrued property taxes and
other liens assumed by the purchaser.
- Land improvements: structural additions with limited lives that are made to
land to make it ready for the intended use.
- Buildings: facilities used in operations to build it or construct it.
- Equipment includes assets used in operations = annual recurring expenditures
and do not benefit future periods.
Ordinary repairs are expenditures to maintain the operating efficiency and productive
life of the unit. = Debit in Maintenance and Repairs Expenses = revenue
expenditures. ≠ Additions and Improvements: costs incurred to increase the
operating efficiency, productive capacity or useful life of a plan asset = capital
expenditures.
To know if revenue or capital expenditure: refer to the materiality (impact of the
item’s size on a company’s financial operations). Materiality concept: if an item
doesn’t make a difference in decision-making, the company doesn’t have to follow
IFRS.
Depreciation is the process of allocating to expense the cost of a plant asset over its
useful (service) life in a rational and systemic manner. Process of cost allocation, NOT
asset valuation. So book value ≠ fair value.
Depreciation occurred for land improvements, buildings and equipment =
depreciable assets. (Usefulness/ revenue-producing decline).
Revenue producing declines because of Wear and Tear; obsolescence (becoming out
of date before the asset physically wears out).
Recognition of depreciation doesn’t mean accumulation of cash for replacement of
the asset (Not a cash fund).
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