Accounting for Long-Term Assets — Depreciation, Amortization, Impairment, and ROA Explained | Chapter 7 of Financial Accounting

Chapter 7 of Financial Accounting (12th Edition) by Thomas, Tietz, and Harrison explores how businesses account for long-term assets—plant assets, natural resources, and intangibles—that support operations across multiple periods. From capitalizing asset costs to measuring depreciation and impairment, this chapter offers comprehensive coverage of fixed asset accounting under GAAP and IFRS frameworks.

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📘 Book Overview

The chapter begins with the cost principle—defining asset cost as all expenses necessary to acquire and prepare the asset for use. This includes the purchase price, sales tax, legal fees, transportation, and installation. When acquiring multiple assets in a lump-sum purchase, companies must allocate costs based on relative market values.

🏗 Capital Expenditures vs. Immediate Expenses

• Capital expenditures — Add future value or extend asset life; recorded as assets.
• Immediate (revenue) expenses — Maintain asset’s current condition; expensed immediately.

Understanding this distinction is crucial for correctly classifying expenditures in financial reporting.

📉 Depreciation Methods for Plant Assets

Depreciation allocates an asset’s cost over its useful life. GAAP allows several methods, including:

• 📊 Straight-Line Method — Spreads expense evenly over time.
• ⚙️ Units-of-Production Method — Based on usage (e.g., machine hours, miles).
• 🚀 Double-Declining Balance (DDB) — Accelerated method applying 2× the straight-line rate.

These choices affect net income, taxes, and asset book values.

🔁 Asset Disposal and Gain/Loss Recognition

Disposing of assets—whether through sale, discard, or exchange—requires updating accumulated depreciation and recognizing gains or losses. Journal entries reflect the removal of the asset’s book value and any cash or value received in return.

🌱 Natural Resources and Depletion

Natural resources (like oil, timber, and minerals) are depleted as they’re extracted and used. Depletion is similar to depreciation, except the cost is transferred to inventory and then COGS as the resource is sold.

🧠 Accounting for Intangible Assets

Intangible assets—such as patents, trademarks, copyrights, franchises, and goodwill—are non-physical but hold long-term value. The chapter covers:

• Amortization — Applied to finite-life intangibles (e.g., patents).
• Impairment — Recognition of value loss below book value, using a two-step GAAP process.
• IFRS — Allows reversals of impairments in some cases, unlike GAAP.

Goodwill is not amortized but must be tested for impairment annually.

📊 Return on Assets (ROA) and DuPont Analysis

To assess how well a company uses its assets to generate profit, the chapter introduces:

• ROA (Return on Assets) = Net Income ÷ Average Total Assets
• DuPont Analysis = Net Profit Margin × Total Asset Turnover

This breakdown helps analysts understand whether profitability is driven by efficient asset use or high profit margins.

💼 Asset Accounting and the Statement of Cash Flows

Long-term asset transactions appear on the statement of cash flows as investing activities (e.g., asset purchases and sales). Meanwhile, depreciation and amortization are non-cash items listed under operating activities to reconcile net income with cash flow.

📚 Summary

Chapter 7 gives students a complete understanding of how to record, allocate, and evaluate long-term assets under both GAAP and IFRS. With attention to depreciation, amortization, impairment, and ROA, it ties together operational decisions with financial reporting. Mastery of these concepts is essential for accountants, auditors, and financial analysts who interpret asset-heavy balance sheets and profitability metrics.

📺 Want to master asset depreciation and impairment testing? Watch the full episode here for practical examples and guided calculations.

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