Accounting & auditingLesson 4 of 5 in the course Accrual Accounting Process

Fixed-Asset Capitalization and Depreciation: Cost, Methods, and Reporting Effects

5 flashcards · 5 quiz questions · 5 match pairs · 4 fill-in sentences · English

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Summary

This lesson explains how to distinguish fixed assets from other business purchases and how to decide which acquisition costs belong in an asset’s recorded cost. These decisions matter because they affect both the balance sheet and the timing of expenses.

An asset is an economic resource a business owns. Assets may be current or long term, and tangible or intangible. A long-term asset is expected to be used for more than one year and is generally held to support business operations or generate future revenue, rather than for resale.

All flashcards

What is a fixed asset?
A material, long-term tangible asset used in operations rather than held for resale.
What is an asset’s historical cost?
The costs necessary to acquire it and prepare it for its intended use.
What does the matching principle require for a long-lived asset’s cost?
Recognize the cost as expense in the periods that benefit from the asset’s use.
What is accumulated depreciation?
The total depreciation expense recorded for an asset since it was placed in service.
Why must capitalization decisions follow accounting standards?
Improperly capitalizing costs that should be expensed overstates assets and current-period income.

Quiz questions

  1. All else equal, how does capitalizing a qualifying long-term asset generally affect income in the purchase period compared with expensing its full cost immediately?Answer: It generally produces lower expense and higher net income in that period.
  2. An asset has a five-year useful life. What double-declining-balance rate is applied to its beginning book value?Answer: 40%
  3. Under the units-of-production method, what primarily determines depreciation expense for a period?Answer: The asset’s actual activity during that period.
  4. What does depreciation represent for an operational tangible asset?Answer: Allocation of its depreciable cost over its useful life.
  5. What is a likely effect of improperly capitalizing an ordinary operating cost that should be expensed?Answer: Assets and current-period net income are overstated.

Based on Principles of Finance by Julie Dahlquist, Rainford Knight (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.

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