Managerial Accounting

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Managerial Accounting Powered By Docstoc
					Managerial Accounting

        Week Two Notes
   David B. Hamm, MBA, CPA
           June 2002
       Revised May 2004
When is Income Earned?
   Cash basis accounting:
       Revenues realized only when cash received
       Expenses realized when actually paid
       Key advantage--simplicity
   Accrual basis accounting:
       Revenues realized when constructively earned
       Expenses realized when constructively incurred
       Key advantage—matching of revenues/expenses
        to correct accounting period
Issues Related to Non-current Assets
   Asset Acquisition—
       Measurement of asset cost (including
        installation & setup)
   Asset cost allocation—
       Matching cost to periods of useful life
        (depreciation/amortization/depletion)
   Asset disposal--
       Gains or losses
Group purchase of assets
   See handout illustration for example:
   If a ―bargain purchase‖ overall purchase
    price should be allocated ratably among
    all assets acquired according to FMV‘s
   If purchase price includes a ―premium‖
    over asset FMV‘s, ―Goodwill‖ is
    generated (to be discussed later)
Non-Current Assets
   Property, plant & equipment
       Land—recorded at cost, non-depreciable
            Cost includes upgrading to intended use
       Plant/Equipment—recorded at cost,
        depreciated over useful lives
   Intangible assets
       Legal rather than physical existence
       Amortized over shorter of legal or useful
        life
Non-current assets (continued)
   Natural resources—‖wasting‖ resources:
       Mineral interests, timber, oil & gas, etc.
       Subject to depletion—write off of original
        cost on a ―units of output‖ method
       Acquisition costs include costs of acquiring
        rights, exploration & development, and
        restoration to original use
Depreciation—plant & equip.
   Two major theories to consider here:
       Allocate cost “ratably / evenly”over life-
            straight-line or units of output methods
       Accelerated depreciation—offset higher initial
        depreciation costs against increasing
        repair/maintenance costs in the future
            Declining balance depreciation
            Sum of year‘s digits—seldom used anymore
            MACRS—tax depreciation
       See handouts for illustrations
Intangible assets-examples:
   Patents—legal life 17 yrs, non-renewable—
    product or process
   Copyrights—life of creator + 70 yrs—artistic,
    written, composed, programmed
   Trademarks—20 years, renewable—word,
    phrase, or symbol
   Franchises—access to a business model or
    other intangible—per contract
   Goodwill—‖value‖ of a business apart from its
    assets—indefinite life
Goodwill—general notes
   Can only be created through sale of a
    business—premium paid over net asset FMV
   FASB currently (SFAS 142) declares goodwill
    non-amortizable, but requires a periodic
    review to determine if goodwill is ―impaired‖
    and should be written down
   International standards encourage a short
    amortization period (recommended 5 yrs)
Accounting for Leases (brief):
   Operating lease—
       acquiring right to use an asset only for a fixed
        period of time
       Rent expense is recorded when incurred
   Capital lease—
       Acquiring right to use an asset for its entire useful
        life
       ―Cost‖ of the asset is the present value of the total
        lease obligation, with annual depreciation based
        on this cost
       Concurrent liability as a long-term obligation
Present value analysis (brief)
   ―A bird in the hand is worth two in the
    bush‖—ancient but effective illustration
    of present value
   Money has value over time
   This will be covered in more detail in
    the Finance module
Sale of Fixed Assets
   If an asset is sold for a price greater than its
    ―book value‖ (BV = cost – accumulated
    depreciation), a capital gain is recognized for
    the difference.
   Similarly, if an asset is sold for a price less
    than BV, a capital loss is recognized for the
    difference.
   If the asset is ―trashed,‖ again a capital loss
    is recognized for the un-depreciated BV
Other Disposals of Fixed
Assets (1)
   Rules are more complex if an old asset that
    still has BV is ―traded in‖ on a new asset.
       Conservatism does not allow a ―gain‖ on trade-in.
        Any gain is considered a discount against the cost
        of the new asset
       Conservatism does require a ―loss‖ on trade-in to
        be booked, however
       But the IRS will not allow a loss deduction for
        trade-ins. The loss must be added to basis of the
        new asset, even if it increases it above list price
       Don‘t get bogged down on these accounting
        specifics.
Other Disposals of Fixed
Assets (2)
   If a fixed asset is donated to a charity, on the
    books the donation is recorded at BV
   But here the IRS is more generous—if FMV of
    the used asset is greater, firm (or individual)
    may deduct the FMV on tax return, rather
    than BV (thus creating another reconciling
    difference between books and tax return)
Repairs vs. Improvements
   If funds are expended on an existing asset,
    when is it a ―repair‖ (expense), and when is it
    an ―improvement‖ (capitalized)?
       In theory, if the expenditure restores asset‘s
        function, but does not extend its life beyond
        original estimates or improve its usefulness, it is
        an expense. Otherwise, it should be capitalized.
       In practice, accountants often prefer to expense
        rather than alter/recalculate cost and depreciation
        schedules.
Current liabilities
   Generally created by day to day operations
       Accounts payable—payments due vendors or
        other suppliers of inventory/ goods used
       Accrued liabilities—expenses booked (matching
        concept) but not yet paid
            Payroll liabilities, payroll taxes
            Estimated warranty liabilities
       Unearned revenue /deferred credits (deposits)
            Received in advance for services to be rendered
            Liability until service is rendered and thus earned
Long-term debt
   Firms issue long-term debt to gain
    funds needed for asset investment and
    to secure financial leverage (potential
    returns justify borrowing)
       Mortages or mortgage bonds—secured by
        real estate acquired
       Bonds payable—next slide
       Bond ―indenture‖—contract between issuer
        and bond holders
) Bonds Payable (characteristics)
   Fixed interest rate (‗stated‘ or ‗coupon‘ rate)
   Interest payable at fixed periods (usually
    quarterly or semi-annually)
   Face amount of bond = principal borrowed
   Interest rate fluctuations often result in bonds
    issued at a premium or discount
       If sold at a discount—market rate > coupon rate
       If sold at a premium—market rate < coupon rate
       Discount or premium is amortized over life of bond
        as an adjustment to interest expense
Bonds Payable (continued)
   Stated maturity date, but bonds are often
    ―callable‖—option to redeem early if interest
    rates change significantly, etc.
   ―Sinking fund‖—accumulate funds for
    repayment of principal
   Term bonds—lump sum payment at maturity
    date
   Serial bonds—repaid in installments
Bonds Payable (continued)
   Convertible bonds—may be converted to
    equity securities (stock) at option of
    bondholder
   Registered bonds—bond issuer retains
    records of all bond holders and issues interest
    checks to holders of record
   Coupon or ―bearer‖ bonds—interest paid to
    bond holder through ―clipping‖ of a coupon—
    IRS now requires registration of all
    bondholders for 1099-INT reporting