ACIS Chapter 9+10

• The resource a company had that are used in operations of a business. Fixed assets are resources that are used to generate revenue and they have a useful life of several years
• Fixed assets, plant and equipment, plant assets

• -Recorded at historical cost
• -Cost of asset is equal to all the costs of getting that asset and making it work
• -Reccuring expenses are not included in the cost of the asset

• Renting equipment which conserves cash
• Leased equiptment might not show up on a balance sheet
• Operating leases - payment treated as an expense
• Capital lease - company records an asset and a liability
• Recorded as a liability

• An accounting process, not a valuation method
• Cost allocating process
• Spread the cost of an assets over the several years the business will benefit from having the asset
• Has nothing to do with what something's worth

Cost of asset - Accumulated depreciation

• We can depreciate land improvements, buildings and equipment but not land
• You allocating the original cost of the asset over several years

• Cost
• Useful life
• Salvage value

• (Cost - Salvage value)/ useful life
• (what we orginaly paid - what we think it'l be worth)/ useful life

• (1) depreciation expense = (Cost - accumulated depreciation) x 2 / useful life
• -multiply book value times 2 and divide it by useful life
• (2) Depreciation expense = Book value at beginning of period x Depreciation Rate
• Depreciation Rate = 2 / useful life

depreciable cost / Total units of activity

Depreciabel cost per unit x Units of activity

Record an expenditure as an asset

Book value - Revised Salvage Value

• The loss of a significant portion of the utility of an asset through 
• -Casualty
• -Obsolescence
• -Lack of demand for the asset's services
• Permanent imparement

• Sale
• Retirement
• Exchange

Net sale / average total asset

• Accounts payable
• Notes payable
• Sales tax payable
• Unearned sales revenues
• Current maturities of long term debt
• Payroll and a payroll taxes payable

• Major headache for businesses
• Many rules and regulations, vary by state and locality
• Payroll processing frequently outsourced

Initial investment x Interest Rate x Time

• Initial investment x (1 + i)ⁿ
• i = percentage
• n= time

Multiply the amount initially invested times the factor from the times table

Future Value / (1 + i)ⁿ

1 / (1 + i)ⁿ

• Stream of payments
• FV = future value of a stream of payments
• PV = value today of a stream of payments

• A way for corporations to borrow large sums of money from lots of different investors
• Typically valued at $1000
• -Face value stated, 
• -Interest rate stated
• -Maturity date stated
• variable is the price of bond

Stated rate of interest = market rate of interest

• Stated rate of interest < Market rate of interest
• -The cash payment investors can receive from the bonds is less than the return investors can get else where. They have to sell the bonds lower
• A valuation account, normal balance is a debit balance
• An additional cost of borrowing recorded as additional interest expense over life
• Amoratization of discount makes the effective interest rate equal to market rate of interest

• -Present value of the face value of the bonds
• -Present value of the stream of interest payments

Calculate the interest expense by multiplying the carrying value of the bonds at the beginning of the period x the market rate of interest

• Stated rate of interest > Market rate of interest
• Cash payment investors can reveive from bond is more than the return investors can get elsewhere. Now investors are willing to pay premium for the bonds
• A valuation account, normal balance is a credit balance
• Reduce the cost of borrowing and reduce interest expense over life
• Amortization makes the effective interest rate equal to the market rate of interest

stated rate, bond sells for face value

• When the company that issued them buys them back 
• Paying back the money it borrowed

• Mortgage
• Paid back in installment payments
• Part of payment reduces principal, part of payment is interest
• Principal payments for the next year are classified as current liabilities
• All payments beyond the next year are long term liabilities