Assets Classification Quiz

Asset Classification

• Non-current assets, also known as long-term assets, include land, as it is not expected to be used or converted into cash within a year.
• Current assets, on the other hand, are expected to be used or converted into cash within a year and include inventory, cash, and accounts receivable.

Property, Plant, and Equipment (PPE)

• PPE are tangible assets, such as equipment, buildings, and land, that are used in business operations and are depreciated over their useful lives.
• They are not held for resale and are not intangible assets.
• They are classified as non-current assets.

Depreciation

• Depreciation is the decrease in asset value over time, representing the allocation of the asset's cost to the periods in which it is used.
• Depreciation expense is reported on the income statement.
• Factors that affect the calculation of depreciation include the cost of the asset, salvage value, and useful life, but not market demand.

Depreciation Methods

• The straight-line method calculates annual depreciation expense by dividing the cost of the asset by its useful life.
• The double-declining balance method results in a higher depreciation expense in the early years of an asset's life.
• The units-of-production method and sum-of-the-years'-digits method are other methods of depreciation.

Salvage Value

• The salvage value of an asset represents the amount the asset can be sold for at the end of its useful life.

Purpose of Depreciation

• Companies use depreciation to match the cost of an asset with the revenue generated by the asset, thereby reducing taxable income.
• Depreciation does not directly affect the gross profit margin.

Financial Metrics

• The depreciation method used can affect net income, return on assets, and earnings per share, but not gross profit margin.