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Financial Accounting
Prof. Adriana Tiron-Tudor - course
Lect. Szilveszter Fekete - practice
att
Agenda course 1-2
1. Objectives
2. Assets definition and recognision
3. Tangible assets
4. Depreciation
5. Recording of the transactions with tangible assets
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That tangible assets
represent a significant portion of both total and fixed assets
are physically observable items, held for use in the
production, sale or supply of goods or services, for rental to
others, or for administrative purpose, and are expected to be
used during more than one period
are different from inventories
1. Objectives
After studying this chapter, you will understand:
How to
distinguish capital expenditures and revenue expenditures
record internally constructed tangible assets
handle financing or borrowing ( interest) cost
1. Objectives
What
the concept of depreciation represents
the main methods of depreciation are
the main concepts are that allow the preparation of a
depreciation schedule
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An asset represents
a source controlled by the entity
as a result of past events
which is expected to generate future economic benefits for the
entity
with a cost that can be credibly evaluated;
2. Assets definition and recognision
An asset is recorded in the balance sheet when:
Future economic benefits are likely to be realized as a result of
keeping (storing), using, selling that certain asset;
That certain asset has a cost or a value that can be evaluated
credibly.
The recognition of the assets in the balance sheet
usually takes place along with the recognition of a
debt or an income in the profit and loss account (the
principle of the connection between the expenses
and incomes).
Acquisition Asset = Supplier (2=4)
Internally constructed Asset = Capitalised costs (2=7)
2. Assets definition and recognision
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In most counties of the Western Europe, the
patrimonial assets are presented in the reverse
order of liquidity, as follows:
Non-current assets
intangible assets
tangible assets
financial assets
Current assets
inventory
receivable
short term investments
cash
Regulation assets
pre-payments
2. Assets definition and recognision
The non-current assets
are also called investment goods, long term assets or immobile
goods.
have the following characteristics:
A period of utilization longer than a year;
They participate in the development of multiple economic
circuits; they are not consumed nor replaced at their first
utilization.
They are fixed in the activity of the patrimonial unit; they arent
directly destined for sale.
They are held for use in the production or supply of goods or
services, for rental to others or for administrative purpose
2. Assets definition and recognision
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Questions/Discussion
A company buys 10 trucks with the payment in
2 weeks. Where will be recorded the trucks
knowing that the companys object of activity
is :
a. transport
b. constructions
c. trade with vehicles
What do you think ?
Which is the proportion that tangible assets
represent in balance sheet in each case.
2. Assets definition and recognision
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birth life death
Definition/
Recognition
Measurement
Acquisition cost
Production cost
Depreciation
Subsequent
expenditures
Capital
expenditures
Sale
Removing a
fully
deprediated
asset from
the books
3. Tangible assets
Accounting issues in reporting tangible assets
3. Tangible assets
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3. Tangible assets
are also called investment goods, long term assets or
immobile goods.
have the following characteristics:
A period of utilization and liquidation longer than a
year;
They participate in the development of multiple
economic circuits; they are not consumed nor
replaced at their first utilization.
They are fixed in the activity of the patrimonial
unit; they arent directly destined for sale.
RO value higher than 1.800 Ron
3. Tangible assets
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Contains the material goods of long utilization in the
activity of the entity.
According to the IAS 16 a tangible asset must be
acknowledged in the balance sheet if:
It is estimated to generate economic benefits
for the artificial person and
The cost of the asset can be evaluated credibly
Are recorded at cost.
cost consists of all expenditures necessary to acquire
the asset and make it ready for its intended use.
3. Tangible assets
In the category of the tangible assets are contained:
The land
Land improvements
Buildings
Plant, machinery, motor vehicles etc.
Equipments and furniture
Tangible assets in progress
Payments on account
3. Tangible assets
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1. Land and land improvements are recorded
on two categories: land and land
improvements.
The land can be displayed on the following
categories: build on lands, non build on lands, lands
with deposits, agricultural, forest lands etc.
The land improvements are investments
effectuated and destined to enrich the lands, lakes,
swamps, other similar elements but also irrigation
systems, works of access, recordation at the energy
sources, embankments etc.
3. Tangible assets
Acquisitions
Cost of Land Includes:
the cash purchase price
closing costs such as title and attorney's fees
real estate brokers commissions
accrued property taxes and other liens on the land
assumed by the purchaser.
3. Tangible assets
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All expenditures necessary to make the improvements ready
for their intended use.
Examples:
Drive ways
Parking lots
Fences
Underground sprinklers
Cost of Land Improvements include:
3. Tangible assets
The buildings contain halls, administrative
buildings, warehouses, including the
necessary installations (heat, telephone,
energy, water etc.) where the
enterprises activities take place:
production,
services,
commerce,
administration etc.
3. Tangible assets
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When a building is purchased such
costs include the:
purchase price
closing costs (attorney's fees title
insurance)
real estate broker's commissions.
Cost of making a building ready for
its intended use consist of:
expenditures for remodeling rooms or offices
replacing or repairing
roof
floors
electrical wiring
plumbing
3. Tangible assets
Buildings cost includes all necessary expenditures
relating to the purchase or construction of a building
When a building is constructed, its cost
consists of:
the contract price
architect's fees
building permits
excavation cost
interest costs during
during construction.
3. Tangible assets
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The plant, motor vehicles, animals and plantations
contain the machines, machinery, work installations,
measurement, control and adjustment devices and
installations, motor vehicles, working animals and
plantations with crop.
The electric and calculation equipments, furniture,
office equipments, protection equipments of human and
material values and other tangible assets.
3. Tangible assets
Store check-out counter
Office furniture
Factory Machinery
Delivery Equipment
Trucks
Airplanes
Examples of Equipment
3. Tangible assets
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Cost of Equipment Includes:
purchase price
sales tax
freight charges and insurance
during transit paid by the
purchaser
expenditures required in
assembling
installing and testing the unit.
3. Tangible assets
Advantages of Leasing an
Asset Versus Purchasing
Reduced risk of
obsolescence
Little or no down
payment
Shared tax advantages
Assets and liabilities not
reported
3. Tangible assets
Questions/Discussion
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The tangible assets in progress contain the tangible
assets received from the third parties and without
receipt, respectively the unfinished investments
effectuated under own administration or enterprise etc.
Content:cost of purchasing, constructing and installing
TA ahead of their productive use
Payment in account payment made by a company
towards the acquisition of as yet undelivered tangible
assets
3. Tangible assets
Internally generated
Valued at Production cost
Cost of raw materials ans components
Cost of labor that was directly involved in generation
Overheads ( indirect costs) energy, supervisory labor
Financial costs (interests costs IAS 23)
3. Tangible assets
A company build oneself an equipment.
The total cost is 100 lei: salaries 55 lei, raw materials 20 lei,
overheads 15 lei.
The useful life of the equipment is 5 years
Straight method is used.
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3. Tangible assets
Difference between tangible assets and inventories
Criteria: nature of companys activity which determines the
purpose for which the asset is held.
Distinction importance
It affects the timing of income recognition
TA annual depreciation expense
Inventory - not
Example:
What kind of asset is an ox ?( p.233)
3. Tangible assets
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Revenue Expenditure (6)
Is a consumption of resources for the purpose
of generating revenue
immediately charged against revenue as an
expense. ( matching principle)
Capital Expenditure (2)
increase the companys investment in
productive activity.
- a longer useful life
- more units of output
- quality increased
Difference between tangible assets and expenses
3. Tangible assets
3. Tangible assets
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Ordinary Repairs
Expenditures to maintain the operating
efficiency and expected productive life of
the asset.
Are usually small in amount that occur
frequently throughout the service life.
Examples:
motor tune-ups
oil changes
the painting of buildings
the replacing of worn-out gears
Ordinary repairs increase Repair Expense
and are revenue expenditures
Ordinary repairs (6)
3. Tangible assets
Additions and Improvements (2)
Costs incurred to increase the:
operating efficiency
productive capacity or
expected useful life of the plant asset.
Are usually material in amount and occur infrequently during the period of
ownership.
Are capital expenditures.
Ex: building a new floor
3. Tangible assets