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OU ACCT 2113 - Chapter 7 Notes

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ACCT 2113 1st Edition Lecture 7 Outline of Last Lecture II. Understanding Inventory and Cost of Goods SoldA. InventoryB. Merchandising companyC. Manufacturing companyD. Calculating Cost of goodsE. Inventory Cost MethodsF. ExampleIII. Recording Inventory TransactionsA.Perpetual vs. Periodic Inventory SystemsB.ExamplesC.Freight chargesD.Purchase discountsE.Purchase returnsF.Multiple step income statementIV. Other Inventory Reporting IssuesA. Lower-of-cost-or-market Method (LCM)B. Calculating the lower of cost or marketC. Inventory turnover ratioD. Gross profit ratioE. ExamplesF. Period-end adjustmentG. Inventory errorsH. Inventory amountsOutline of Current Lecture II. Long-term AssetsA. CategoriesB. Land, equipment, buildings, basket purchase, natural resourcesIII. Intangible AssetsA. PatentsB. CopyrightsC. TrademarksD. FranchisesE. GoodwillThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.IV. Acquisition & ImprovementsA. Repairs and MaintenanceB. AdditionsC. ImprovementsD. Legal defense of intangible assetsV. Cost AllocationVI. DepreciationA. ExampleB. TerminologyC. MethodsD. Tax depreciationVII. Amortization of Intangible AssetsA. ExampleB. Assets not subjectVIII. Asset DispositionA. Disposal of Long-term assetsB. Recording DisposalsC. Sale, retirement, exchangeD. Asset AnalysisCurrent Lecture Chapter 7: Long-term AssetsProperty, plant, and equipment. Assets in this category include land, land improvements, buildings, equipment, and natural resources. More of a physical substance.Intangible assets. Assets in this category include patents, trademarks, copyrights, franchises, and goodwill. We distinguish these assets from property, plant, and equipment by their lack of physical substance. Part A Acquisition and ImprovementsWe record a long-term asset at its cost plus all expenditures necessary to get the asset ready for use.When we make an expenditure, we have the choice of recording it as an expense of the current period or recording it as an asset and then expensing it over future periods. We use the term capitalize to describe recording an expenditure as an asset. This choice depends on when the company benefits from having the asset: in the current period or over future periods. Determining which costs to record as expenses and which to record as long-term assets are crucial.The Land account represents land a company is using in its operations. In contrast, land purchased for investment purposes is recorded in a separate investment account. We capitalize to land all expenditures necessary to get the land ready for its intended use. Capitalized costs include the purchase price of the land plus closing costs such as fees for the attorney, real estate agent commissions, title, title search, and recording fees. In fact, any additional expenditure such as clearing, filling, and draining the land, or even removing old buildings to prepare the land for its intended use, become part of the land’s capitalized cost.Beyond the cost of the land, a company likely will spend additional amounts to improve the landby adding a parking lot, paving, temporary landscaping, lighting systems, fences, sprinkler systems, and similar additions. These are Land improvements. We record them separately from the land itself because, unlike land, these assets are subject to depreciation. Buildings include administrative offices, retail stores, storage warehouses, and manufacturing facilities. The cost of acquiring a building usually includes realtor commissions and legal fees in addition to the purchase price. The new owner sometimes needs to remodel or otherwise modify the building to suit its needs. These additional costs are part of the building’s acquisitioncost. Unique accounting issues arise when a firm constructs a building rather than purchasing it. The cost of construction includes architect fees, material costs, and construction labor. Besides these, new building construction likely also includes costs such as officer supervision, overhead (costs indirectly related to the construction), and capitalized interest.Capitalized interest refers to interest costs we add to the asset account rather than recording them as interest expense. Equipment is a broad term that includes machinery used in manufacturing, computers and other office equipment, vehicles, furniture, and fixtures. The cost of equipment is the actual purchase price plus all other costs necessary to prepare the asset for use. These can be any of a variety of other costs including sales tax, shipping, delivery insurance, assembly, installation, testing, and even legal fees incurred to establish title.Rather than including recurring costs, such as annual property insurance and annual property taxes, as part of the cost of the equipment, we expense them as we incur them in order to properly match them with revenues. Sometimes companies purchase more than one asset at the same time for one purchase price. This is known as a basket purchase. How much should we record in the separate accounts for each asset? The simple answer is that we allocate the total purchase price based on the estimated fair values of each of the individual assets. The difficulty, though, is that the estimated fair values of the individual assets often exceed the total purchase price. In such cases, total purchase price is allocated to the separate accounts based on their relative fair values.In addition to land, buildings, and equipment, many companies depend heavily on natural resources , such as oil, natural gas, timber, and even salt. ExxonMobil , for example, maintains oil and natural gas deposits on six of the world’s seven continents.We can distinguish natural resources from other property, plant, and equipment by the fact thatwe can physically use up, or deplete, natural resources.A primary concern with regard to natural resources is sustainability. A common definition of sustainability is “meeting the needs of the present without compromising the ability of future generations to meet their own needs.”Intangible Assets-Companies can either (1) purchase intangible assets like patents, copyrights, trademarks, or franchise rights from other entities or (2) create intangible assets internally by developing a newproduct or process and obtaining a protective patent. Reporting purchased intangibles is similar to reporting purchased property, plant,


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