Principles of Finance · free preview
Capitalize or Expense
A cost is capitalized when it creates a long-term asset whose benefits extend beyond the current period and is then depreciated over the asset's useful life, while routine repairs and maintenance are expensed immediately, and the choice moves profit between periods and shapes reported investment.
1. The classification question
The classification question
2. Classifying the borderline items
Classifying the borderline items
3. The earnings effect
The earnings effect
4. Depreciation preview
Depreciation preview
5. The classification rule
Which statement states the capitalize-versus-expense decision rule correctly?
6. Shipping and taxes on new equipment
Why are the shipping costs and taxes paid to acquire new production equipment capitalized rather than expensed?
7. The repair classification
Why is the cost of a minor repair on existing production equipment expensed immediately?
8. Effect on current earnings
Holding the underlying economics fixed, how does capitalizing a 5,000 dollar cost rather than expensing it change this year's reported earnings, ignoring taxes?
9. Land for resale versus land for use
A firm owns two parcels, one held for a future warehouse and one held for resale when its value rises. How are they classified?
10. Depreciation's true nature
Which statement about depreciation is correct?
11. The gradual charge
What one-word term names the systematic allocation of a capitalized asset's cost over its useful life? Answer in lowercase.
12. The working asset class
What three-word phrase names the balance sheet class holding land and equipment used in operations? Answer in lowercase.
13. The expensing of long-term cost
What two-word term describes the cost of a capitalized asset as it sits on the balance sheet before depreciation? Answer with two words.
14. The asset held for appreciation
What one-word term names an asset class for land or securities held for price appreciation rather than operational use? Answer in lowercase.
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