Project Two Analysis Paper (1)

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Jan 9, 2024

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1 Project Two Analysis Paper Charisma Johnson Southern New Hampshire University ACC 317: Intermediate Accounting I Julie Dawson October 15, 2023

2 Project Two Analysis Paper Cash flows, investments in property, plant, equipment, and capital expenditures play a vital role in a company's financial success. These assets significantly impact a business's ability to meet customer demand and are often the most essential items on a company's balance sheet. When a company acquires plant assets, it records them at their historical cost, which includes all costs associated with preparing the investment for its intended use. This cost is then used to account for the asset's value over its useful life. It's essential to carefully consider which expenditures to include in property, plant, and equipment. Expenses that only maintain a given level of service should be expensed, while spending expected to result in more excellent future benefits should generally be included. Most companies rely on historical costs to determine the value of their property, plant, and equipment. This cost consists of the purchase price minus sales tax, associated shipping and freight charges, and expenses required to prepare the asset for its intended use, such as installation or testing. Depreciation is a vital accounting technique used to account for the decline in value of a company's assets as they age. Businesses use this method to spread the cost over the useful life of the purchase instead of deducting the total cost of an investment all at once. Accountants follow generally accepted accounting principles (GAAP) to calculate depreciation and have four ways to choose from straight-line, declining balance, sum-of-the-years' digits, and production units. The most suitable method varies depending on a business's size, industry, accounting requirements, and types of assets. The simplest and most used method is the straight-line method, which estimates an asset's useful life and salvage value at the end of its life. Under this method, depreciation expenses are recorded annually, and I recommend using it for this company.

3 Asset disposal accounting involves reversing the fixed asset's recorded cost and the corresponding amount of accumulated depreciation, determining whether the difference between them is a gain or loss. To calculate the profit or loss, subtract the asset's carrying value from the net proceeds from its disposal. When a company disposes of an asset, it removes the cost of the purchase, the accumulated depreciation, and any impairment losses from its balance sheet. Any resulting cash receipts, gains, or losses are recognized on the income statement. When a company acquires another company, it gains an intangible asset known as goodwill. This asset represents the competitive advantage that the acquiring company can derive. The excess purchase price over the net fair value of all assets and liabilities is considered goodwill. This goodwill becomes more valuable over time and is listed in the long-term investments account on the acquiring company's balance sheet as an intangible asset. Unlike tangible assets such as equipment or buildings, goodwill cannot be physically touched or seen. Amortization is spreading out the cost of an intangible asset over its estimated useful life for accounting or tax purposes. Intangible assets such as patents and trademarks are amortized using an expense account, while tangible assets are written off using depreciation. It is important to note that the amount of amortization used for corporate accounting may differ from that used for tax purposes. Long-term assets are a crucial part of a company's fixed costs but can also provide significant advantages. Accurate financial reporting, business valuation, and financial analysis require precise data on a company's long-term assets. For both operating and finance leases, the value of the asset's right-of-use is determined by calculating the present value of lease payments over the lease term, including initial costs and lease incentives. The leased asset's amortization is

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4 calculated by dividing the lease payments over the lease term, resulting in a gradual decrease in the asset value on the balance sheet over time. FASB Codification:  Property plant and equipment Section 360  Investments Section 32X  Intangibles Section 350

5 References Cameron, B. (2020, October 1). Asset Disposal. https://www.fe.training/free- resources/accounting/asset- disposal/#:~:text=Asset%20disposal%20is%20accounted %20for,loss%20on%20the%20i ncome%20statement . Kieso, Donald, E. et al. Intermediate Accounting, Enhanced eText. Available from: Wiley PLUS, (18th Edition). Wiley Global Education US, 2021. https://read.wiley.com/books/9781119778899/page/0/section/top-of-page The Investopedia Team. (2023, June 11). What Are the Different Ways to Calculate Depreciation? https://www.investopedia.com/ask/answers/021815/what-are-different- ways-calculate-depreciation.asp Tuovila, A. (2022, June 24). Amortization of Intangibles. https://www.investopedia.com/terms/a/amortization-of- intangibles.asp#:~:text=Amortization%20of%20intangibles%2C%20also%20simply,an% 20expense%20account%20called%20amortization .