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2 Financial Statement Accounting Problems

DQ 1

a. What is the purpose of depreciation?

Does the book value of a fixed asset (cost minus accumulated depreciation) tell a user what the asset is worth? Why or why not?
Should the financial statements reflect the value of fixed assets? Why or why not?

b. What are the different methods used to calculate depreciation?
How does a company decide which method they should utilize?
How does their choice affect the financial statements?
Should we standardize the method of depreciation to be used, to enhance comparability?

Explain your answer.

DQ 2

What is an intangible asset?
Should all intangible assets be subject to amortization? Why or why not?
Why are some intangible assets not amortized?
What is the implication to the financial statements?

Solution Preview

DQ 1

a. What is the purpose of depreciation?

It is a system of accounting which aims to distribute the cost or other basic value of tangible capital assets, less salvage if any, over the estimated useful life of the unit, in a systematic and rational manner. It is a process of allocation, not of valuation.

Does the book value of a fixed asset (cost minus accumulated depreciation) tell a user what the asset is worth? Why or why not?

No, the book value of a fixed asset (cost minus accumulated depreciation) tells a user what the asset is worth because the depreciation expense is the only allocated expense, which is used to distribute the cost of value of tangible capital assets. The value of the fixed assets may be different in the market since companies are often unable to sell their fixed assets within any reasonable amount of time they are carried on the balance sheet at cost ...

Solution Summary

This solution is comprised of a detailed explanation to explain purpose of depreciation, book value of a fixed asset, different methods used to calculate depreciation, and intangible assets the 400 words of text.

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