Capital asset pricing model ppt

capital asset pricing model theory ppt and introduction to capital asset pricing model ppt
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Dr.DouglasPatton,United States,Teacher
Published Date:26-07-2017
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CHAPTER 10 CAPITAL ASSETS www.ThesisScientist.comCAPITAL ASSETS • Capital assets are long-lived assets that are used in the operations of a business and are not intended for sale to customers. • Capital assets are subdivided into two classes: 1. Tangible (with physical substance) 2. Intangible (without physical substance) www.ThesisScientist.comTANGIBLE ASSETS Tangible assets include: • property, plant and equipment • natural resources such as mineral deposits, oil and gas reserves, and timber www.ThesisScientist.comPROPERTY, PLANT AND EQUIPMENT Property, plant and equipment can be classified as: 1. Land 2. Land improvements 3. Buildings 4. Equipment www.ThesisScientist.comINTANGIBLE ASSETS Intangible assets provide future benefits through the special rights and privileges they convey. Examples: • Patents, copyrights, sports contracts, and trademarks  © www.ThesisScientist.comDETERMINING THE COST OF CAPITAL ASSETS • Capital assets are recorded at cost in Invoice accordance with the cost principle. • Cost consists of all expenditures necessary to 1) acquire the asset and 2) make it ready for its intended use. • These costs include purchase price, freight costs, and installation costs. • Expenditures that are not necessary should be recorded as expenses, losses, or other assets. www.ThesisScientist.comMEASUREMENT OF CAPITAL ASSET COST • Cost is measured by the cash paid in a cash transaction or by the cash equivalent price when non- cash assets are used in payment. • The cash equivalent price is equal to the fair market value of the asset given up or the fair market value of the asset received, whichever is more clearly determinable. www.ThesisScientist.comLAND • The cost of Land includes: 1. cash purchase price 2. closing costs such as title and legal fees 3. real estate brokers’ commissions 4. accrued property taxes and other liens on the land assumed by the purchaser • All necessary costs incurred in making land ready for its intended use are debited to the Land account. www.ThesisScientist.comILLUSTRATION 10-2 COMPUTATION OF COST OF LAND Sometimes purchased land has a building on it that must be removed to make the site suitable for construction of a new building. In this case, all demolition and removal costs less any proceeds from salvaged materials are chargeable to the Land account. Land Cash price of property 100,000 Net removal cost of warehouse 6,000 Legal fee 3,000 Cost of land 109,000 www.ThesisScientist.comLAND IMPROVEMENTS The cost of land improvements includes all expenditures necessary to make the improvements ready for their intended use, such as: 1. parking lots Lighting 2. fencing 3. landscaping 4. lighting Parking LotBUILDINGS • The cost of buildings includes all necessary expenditures relating to the purchase or construction of a building. • When a building is purchased, such costs include the purchase price, closing costs, and real estate broker’s commission. • Costs to make the building ready for its intended use consist of expenditures for remodelling and replacing or repairing the roof, floors, wiring, and plumbing. • When a new building is constructed, cost consists of the contract price plus payments for architects’ fees, building permits, interest payments during construction, and excavation costs. www.ThesisScientist.comEQUIPMENT • The cost of equipment consists of the cash purchase price, provincial sales taxes, freight charges, and insurance paid by the purchaser during transit. • Cost includes all expenditures required in assembling, installing, and testing the unit. • Recurring costs such as licenses and annual insurance are expensed as incurred. www.ThesisScientist.comILLUSTRATION 10-3 COMPUTATION OF COST OF DELIVERY TRUCK The cost of equipment consists of the cash purchase price, provincial sales taxes, freight charges, and insurance during transit paid by the purchaser. It also includes expenditures required in assembling, installing, and testing the unit. However, recurring costs such as motor vehicle licenses and accident insurance on company cars and trucks are expensed as incurred. Delivery Truck Cash Price 22,000 Painting and lettering 500 Cost of delivery truck 22,500 www.ThesisScientist.comENTRY TO RECORD PURCHASE OF TRUCK Delivery Truck Cash Price 22,000 Painting and lettering 500 Cost of delivery truck 22,500 The entry to record the cost of the delivery truck and related expenditures is as follows: Account Title and Explanation Debit Credit Delivery Truck 22,500 License Expense 80 Prepaid Insurance 1,600 Cash 24,180 To record puchase of delivery truck. www.ThesisScientist.comENTRY TO RECORD PURCHASE OF MACHINERY Factory Machinery Cash price 50,000 Insurance during shipping 500 Installation and testing 1,000 Cost of factory machinery 51,500 The summary entry to record the cost of the factory machinery and related expenditures is as follows: Account Title and Explanation Debit Credit Factory Machinery 51,500 Cash 51,500 To record puchase of factory machinery. www.ThesisScientist.comAMORTIZATION • Amortization is the process of allocating to expense the cost of a capital asset over its useful (service) life in a rational and systematic manner. • Cost allocation is designed to provide for the proper matching of expenses with revenues in accordance with the matching principle. • During an asset’s life, its usefulness may decline because of wear and tear or obsolescence. • Recognition of amortization does not result in the accumulation of cash for the replacement of the asset. • Land is the only capital asset that is not amortized. www.ThesisScientist.comFACTORS IN COMPUTING AMORTIZATION Three factors that affect the computation of amortization are: 1. Cost: all expenditures necessary to acquire the asset and make it ready for intended use. 2. Useful life: estimate of the expected life based on need for repair, service life, and vulnerability to obsolescence. 3. Residual value: estimate of the asset’s value at the end of its useful life. www.ThesisScientist.comAMORTIZATION METHODS Three methods of recognizing amortization are: 1. Straight-line, 2. Units of activity, and 3. Declining-balance. Each method is acceptable under generally accepted accounting principles. Management selects the method that is appropriate for their company. Once a method is chosen, it should be applied consistently. www.ThesisScientist.comDELIVERY TRUCK DATA To facilitate the comparison of the three amortization methods, we will base all computations on the following data applicable to a small delivery truck purchased by Kim’s Florists on January 1, 2002. Delivery Truck Cost 25,000 Expected residual value 2,000 Estimated useful life (in years) 5 Estimated useful life (in kilometres) 200,000 www.ThesisScientist.comSTRAIGHT-LINE • Under the straight-line method, amortization is the same for each year of the asset’s useful life. • It is measured solely by the passage of time. • In order to compute amortization expense, it is necessary to determine amortizable cost. • Amortizable cost = Cost of Asset - Residual Value

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