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| accelerated depreciation methods |
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| The allocation of the cost of intangible assets in a systematic way. (p. 606). |
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| Profitability ratio that measures how efficiently a company uses its assets to generate sales. Computed as net sales divided by average total assets for the period. The resulting number is the dollars of sales produced by each dollar invested in assets. (p. 627). |
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| composite depreciation rate |
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| The process of allocating the cost of natural resources. (pp. 606, 620). |
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| The process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset. Depreciation is not a matter of valuation but rather a means of cost allocation. (p. 606). |
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| The cost of a tangible asset that will be allocated to expense through depreciation. The base established for depreciation is a function of two factors: an assets original cost minus its salvage (disposal) value. (p. 606). |
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| Part of the expenditures required to find and use natural resources. Usually divided into two parts: (1) tangible equipment costs, and (2) intangible development costs. (p. 621). |
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| The expenditures required to find natural resources; when substantial, companies may capitalize them into the depletion base. Other companies, based on their industry, either capitalize or expense the costs. (p. 621). |
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| The state of an asset in which the asset has ceased to be useful to a company because the demands of the firm have changed. Inadequacy is a physical factor that leads to a companys decision to retire an asset (end its service life). An example would be the need for a larger building to handle increased production. Although the old building may be still be sound, it may not be adequate for the companys purpose. Retired assets are not depreciated and are removed from the books when disposed of. (p. 607). |
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| Often called wasting assets, these include petroleum, minerals, and timber, and have two main features: (1) the complete removal (consumption) of the asset, and (2) replacement of the asset only by an act of nature. (p. 620). |
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| The state of an asset in which the asset becomes out of date before it physically wears out. Obsolescence is an economic factor that leads to a companys decision to retire an asset (end its service life). Retired assets are not depreciated and are removed from the books when disposed of. (p. 607). |
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| profit margin on sales ratio |
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| Profitability ratio that measures the companys use of its assets to produce net income. Also called rate of return on sales. Computed as net income divided by net sales. This measure indicates the percentage of each dollar of sales that results in net income. By relating the profit margin on sales to the asset turnover for the period, we can find out how profitably the company used assets during that period of time. (p. 628). |
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| rate of return on assets (ROA) |
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| The rate of return a company achieves through use of its assets. Computed as net income divided by average total assets. ROA indicates the amount of net income generated by each dollar invested in assets. By relating the profit margin on sales to the asset turnover for the period, analysts can find out how profitably the company used assets during that period of time. (p. 628). |
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| The costs incurred to restore property to its natural state after extraction has occurred. (p. 621). |
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| The estimated amount that a company will receive when it sells an asset or removes it from service. It is the amount to which a company writes down or depreciates the asset during its useful life. (p. 606). |
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| Depreciation method that uses a decreasing fraction of depreciable cost (original cost less salvage value), using the sum of the years of the assets service life as a denominator and the number of years of estimated life remaining as of the beginning of the year as the numerator. The numerator decreases year by year, and the denominator remains constant, which results in a decreasing depreciation charge. At the end of the assets service life, the balance remaining should equal the salvage value. (p. 610). |
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| The replacement of one asset with another more efficient and economical asset. Supersession results in a company retiring an asset (ending its service life). Retired assets are not depreciated and are removed from the books when disposed of. (p. 607). |
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| Modified Accelerated Cost Recovery System (MACRS) |
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