When a Company Acquires an Asset That Will Provide Benefits

question 24

Essay

When a company acquires an asset that will provide benefits for several years,the cost of the asset is allocated over the asset's useful life.The allocation process is operationalized through the choice of one of the generally accepted depreciation methods.In choosing a depreciation method to apply,company management is required to make several estimates as part of this allocation process such as the following:
1.Over what period of time will benefits from using the asset accrue?
2.What will be the value of the asset when its use is discontinued?
3.Will the benefits be realized evenly of the life of the asset or will they be higher in some years than in others?
Required:
1.What factors should management consider in making a change in depreciation methods?
2.Explain how a change in depreciation methods is reported in the financial statements and why the Financial Accounting Standards Board chose this approach.

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Definitions:

Days' Sales in Inventory

A financial metric indicating the average number of days a company takes to sell its inventory.

Statement of Financial Position

Another term for a balance sheet, which is a financial document that provides a snapshot of an entity’s assets, liabilities, and shareholders' equity at a specific point in time.

Statement of Comprehensive Income

A financial statement that includes all changes in equity during a period except those resulting from investments by owners and distributions to owners, encompassing both net income and other comprehensive income items.

Average Inventory

The average stock of goods held over a certain period, calculated to understand inventory levels better.