Accounting Chapter 7 - Operating Assets

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Questions and Answers

What is accumulated depreciation?

The total amount of the depreciation expense that has been recorded for an asset since the asset was acquired.

What does amortization refer to?

The process of systematically allocating the cost of intangible operating assets as an expense among the accounting periods.

How is the average age of fixed assets computed?

By dividing accumulated depreciation by depreciation expense.

What does book value (carrying value) represent?

The value of an asset or liability as it appears on the balance sheet. Signup and view all the answers

What is a copyright?

An intangible asset that grants the holder the right to publish, sell, or control a literary or artistic work. Signup and view all the answers

What does the term 'cost' refer to in a business context?

The amount of cash or cash equivalent sacrificed for goods and/or services expected to bring benefit. Signup and view all the answers

What is the declining balance depreciation method?

An accelerated depreciation method that produces a declining amount of depreciation expense each period. Signup and view all the answers

Define depletion in accounting.

The process of allocating the cost of a natural resource to each period in which the resource is removed from the Earth. Signup and view all the answers

What is meant by depreciable cost?

Depreciable cost is calculated as the cost of the asset less its residual (or salvage) value. Signup and view all the answers

What does depreciation expense represent?

The amount of depreciation recorded on the income statement. Signup and view all the answers

What is the fixed asset turnover ratio?

A ratio that indicates how efficiently a company uses its fixed assets. Signup and view all the answers

What is a franchise in business terms?

An exclusive right to conduct a certain type of business in a specific geographic region. Signup and view all the answers

What does goodwill refer to?

An unidentifiable intangible asset that arises from factors such as customer satisfaction and quality products. Signup and view all the answers

What is meant by impairment?

A permanent decline in the future benefits or service potential of an asset. Signup and view all the answers

What are intangible operating assets?

Assets that provide a benefit to a company over years but lack physical substance. Signup and view all the answers

What does involuntary disposal refer to?

A type of disposal that occurs when assets are lost or destroyed through theft or acts of nature. Signup and view all the answers

What are natural resources in business accounting?

Resources that are physically consumed as they are used by a company. Signup and view all the answers

What are operating assets?

Assets used to generate operating income, including cash, inventories, and property. Signup and view all the answers

What are organizational costs?

Significant costs such as legal fees and promotion fees that a company incurs when formed. Signup and view all the answers

What is a patent?

A type of intangible asset that grants the holder the right to manufacture, sell, or use a product. Signup and view all the answers

What does property, plant, and equipment refer to?

Tangible, long-lived, productive assets used by a company to produce revenue. Signup and view all the answers

What is research and development (R&D) expense?

The cost of internal development of intangible assets that is expensed as incurred. Signup and view all the answers

What is residual value (salvage value)?

The amount of cash or trade-in consideration expected to be received when an asset is retired from service. Signup and view all the answers

Study Notes

Accumulated Depreciation

Total depreciation expense recorded since the acquisition of an asset.
Reported as a contra-asset on the balance sheet.

Amortization

Systematic allocation of the cost of intangible operating assets over their useful life.
Expense is recognized in accounting periods when benefits are received.

Average Age of Fixed Assets

Estimated by dividing accumulated depreciation by depreciation expense, providing insight into asset longevity.

Book Value (Carrying Value)

Value of an asset or liability on the balance sheet.
Calculated as the asset's cost minus its related contra-account balance.

Copyright

Intangible asset allowing the holder to control and profit from literary or artistic works.
Legal life extends for the life of the author plus an additional 70 years.

Cost

Represents cash or cash equivalents sacrificed for goods/services, expected to yield future benefits.

Declining Balance Depreciation Method

Accelerated depreciation method resulting in reduced depreciation expense over time.
Calculated by multiplying the declining book value of the asset by a constant rate.

Depletion

Cost allocation process for natural resources used, charged to periods when resources are extracted.

Depreciable Cost

Calculated by subtracting the residual (salvage) value from the asset's cost.
This amount is expensed over the asset's useful life.

Depreciation Expense

The depreciation amount reflected on the income statement for financial reporting.

Fixed Asset Turnover Ratio

Measures efficiency in using fixed assets to generate sales.
Calculated by dividing net sales by average fixed assets.

Franchise

Exclusive rights granted to conduct specific business activities within designated geographic regions.

Goodwill

Unidentifiable intangible asset arising from quality factors like customer satisfaction and skilled employees.

Impairment

Permanent decline in the potential benefits or service capability of an asset.

Intangible Operating Assets

Non-physical assets providing long-term benefits, including patents, copyrights, trademarks, and goodwill.

Involuntary Disposal

Asset loss due to theft, natural disasters, or accidents, resulting in unplanned disposal.

Natural Resources

Resources like coal and oil that get consumed by use and require nature's intervention for replenishment.

Operating Assets

Assets utilized to generate operating income, which includes cash, inventories, receivables, and property.
Average operating assets calculated by averaging beginning and ending operating assets.

Organizational Costs

Initial significant expenses incurred during company formation, such as legal and accounting fees.

Patent

Intangible asset granting rights to manufacture, sell, or use a product for 20 years from the grant date.

Property, Plant, and Equipment

Tangible assets necessary for company operations, contributing to revenue generation.

Research and Development (R&D) Expense

Costs incurred for internal development of intangible assets, expensed as they are incurred.

Residual Value (Salvage Value)

Expected cash or trade-in value when an asset is retired from service after useful life.

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Description

Test your knowledge of key concepts in chapter 7 of accounting, focusing on operating assets. This quiz covers essential terms such as accumulated depreciation and amortization, helping to deepen your understanding of asset management in financial reporting.