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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Operating and Capital Expenditures

Property, plant, and equipment generally represents a material portion of the total assets of most companies. Accounting for the acquisition and usage of such assets is, therefore, an important part of the financial reporting process.

Required:

  1. 1. Distinguish between operating and capital expenditures and explain why this distinction is important.
  2. 2. Briefly define depreciation as used in accounting.
  3. 3. identify the factors that are relevant in determining annual depreciation expense and explain whether these factors are determined objectively or whether they are based on judgment.
  4. 4. Explain why depreciation expense is usually shown in the net cash flow from operating activities section of the statement of cash flows.

1.

To determine

State the difference between operating and capital expenditure and describe why this distinction is important.

Explanation

Capital expenditures:

These costs are incurred to extend the useful life, production capacity, and operating efficiency of the asset. These costs do not recur and are capitalized by increasing the cost of the asset on the balance sheet.

Revenue expenditures:

These costs are incurred to maintain the long-term asset in good condition for the business operations. These costs are recurring, and do not increase the useful life of the asset. These expenses are recorded on the income statement, in compliance with the matching principle, because these expenses are incurred to generate revenue of the current period.

The difference between the capital expenditure and operating expenditures is significant because it includes the timing of the recognition of expense and, as a result, the periodic earnings are computed. This difference also affects the reported assets amounts and usually this reported assets costs have to be recovered from the future periods’ revenues...

2.

To determine

Explain the depreciation used in accounting.

3.

To determine

Indicate the factors that determine the annual depreciation expenses and describe whether these factors are computed objectively or based on judgment.

4.

To determine

State the reason for showing the depreciation expense in the net cash flow from operating activities section of the statement of cash flows.

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