What is the correct capitalization limit?

 http://www.accountingtools.com/questions-and-answers/what-is-the-correct-capitalization-limit.html

A capitalization limit ("cap limit") is the threshold above which an entity capitalizes purchased or constructed assets. Below the cap limit, you generally charge assets to expense instead. There is no specifically required cap limit; you should consider a number of factors before settling upon the most appropriate limit.

If you set the cap limit extremely low, then you'll shift some expenditures into fixed assets that you would normally have charged off at once, which will make short-term profits look somewhat higher. On the other hand, you'll still need to charge these items to expense eventually, so a low cap limit increases your depreciation expense in later years.
If you set a high cap limit, then there will be substantially fewer assets to record in a fixed assets register, which can greatly reduce the work load of the accounting staff.
However, if you set too high a cap limit, then a larger number of big-ticket purchases will be charged to expense in the current period, which tends to make month-to-month profits vary more than operating results would normally indicate.
Setting a low cap limit will also create a larger fixed assets register on which your local government jurisdiction will be more than happy to charge personal property taxes, whereas an excessively high cap limit will yield so few reportable assets that it may trigger a time-consuming government tax audit.
Thus, there is no perfect answer. I prefer having fewer fixed asset records to keep track of, so I prefer a relatively high cap limit. If management wants to impose a really low cap limit in order to bolster short-term earnings, then explain to them that this will result in more short-term income taxes, as well as more personal property taxes, potentially for years to come.

What does capitalize mean?

 http://www.accountingtools.com/questions-and-answers/what-does-capitalize-mean.html

You capitalize an item when you record an expenditure as an asset, rather than an expense. This means that the expenditure will appear in the balance sheet, rather than the income statement.
You would normally capitalize an expenditure when it meets both of these criteria:

• Exceeds capitalization limit. Companies set a capitalization limit, below which expenditures are deemed too immaterial to capitalize, as well as to maintain in the accounting records for a long period of time. A common capitalization limit is $1,000. The materiality principle applies to the capitalization concept.
• Has useful life of at least one year. If an expenditure is expected to help the company generate revenues for a long period of time, then you should record it as an asset and then depreciate it over its useful life, which agrees with the matching principle.

Here are several examples to illustrate the concept:

• A company pays $500 for a notebook computer. The computer has a useful life of three years, but it does not meet the company's $1,000 capitalization limit, so the controller charges it to expense in the current period.
• A company pays $2,000 for maintenance on a machine. The payment exceeds the company's capitalization limit, but it has no useful life, so the controller charges it to expense in the current period.
• A company pays $3,000 for a router. The router has a useful life of four years and surpasses the corporate capitalization limit of $1,000, so the controller records it as a fixed asset and begins depreciating it over its useful life.

A special situation is an asset that is being paid for under a leasing arrangement. If the intent of the lease is essentially to finance the purchase of an asset by the lessee, and it meets with the capitalization criteria noted above, then you should record it as a fixed asset. This type of lease is known as a capital lease.

bless

God bless those victims and also their families.

What is materiality?

http://blog.accountingcoach.com/what-is-materiality/

In accounting, the concept of materiality allows you to violate another accounting principle if the amount is so small that the reader of the financial statements will not be misled.
A classic example of the materiality concept or the materiality principle is the immediate expensing of a $10 wastebasket that has a useful life of 10 years. The matching principle directs you to record the wastebasket as an asset and then depreciate its cost over its useful life of 10 years. The materiality principle allows you to expense the entire $10 in the year it is acquired instead of recording depreciation expense of $1 per year for 10 years. The reason is that no investor, creditor, or other interested party would be misled by not depreciating the wastebasket over a 10-year period.
Determining what is a material or significant amount can require professional judgment. For example, $5,000 might be immaterial for a large, profitable corporation, but it will be material or significant for a small company that has very little profit.

The Meaning of Materiality Concept

Encyclopedia of Business Terms and Methods, ISBN 978-1-929500-10-9. Revised 2012-12-12.

The materiality concept is the principle in accounting that trivial matters are to be disregarded, and all important matters are to be disclosed. Items that are large enough to matter are material items. Materiality refers especially to:

• The level of detail appropriate for different financial reports.
• The importance of errors such as:
  • Reporting expenses, revenues, liabilities, equities, or assets in inappropriate accounts, or reporting them for incorrect reporting periods.
  • Omitting or failing to report important financial data.

The materiality concept is an established, recognized accounting convention. Another such convention is the historical cost convention, by which transactions are recorded at the price prevailing when the transaction is made, and assets are valued at original cost. Comparing the two conventions, however, historical costs are usually ascertained and agreed rather objectively, with little uncertainty, whereas applying the materiality concept may call for more subjective judgment. Moreover, the subjective judgments of senior management, accountants, auditors, boards of directors, stockholders, and potential business partners, can differ, especially when competing interests are involved.
Why is the materiality concept important and necessary in financial accounting? Note that some of the reasons explained below also show that materiality is necessary and inevitable in business case analysis, as well.

http://www.business-case-analysis.com/materiality-concept.html 

What is material? What is not material?

The materiality concept addresses omissions and misstatements in accounting reports and in business case analysis. The central question is: Do they matter?
Some omissions are inevitable and desirable in both cases.

• An income statement, for instance, is meant to help stockholders, management, and boards of directors make judgments—judgments about investing, managing, and evaluating management performance. A statement with too much detail could obscure the "larger picture," could be difficult to prepare, and difficult to read and use.
• Similarly, a business case analysis is a tool for decision support and planning. Non material details are can be simply distracting and pointless.

On the other hand, omission or misstatement of material items would work against the purpose in either case. In the US, the predominant approach to deciding what is material and what is not, is the view written in the GAAP (Generally Accepted Accounting principles) that items are material if they could individually or collectively influence the economic decisions of users, taken on the basis of financial statements.
This definition is consistent with a more formal statement from the board responsible for GAAP, the United States Financial Accounting Standards Board (FASB). Here, materiality refers to ... "the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.¹

Judging the judgment:
What constitutes abuse of the materiality concept?

Abuses of the materiality concept are more likely to have serious legal consequences in accounting, than in business case analysis.
For accountants, GAAP and FASB have resisted putting precise quantitative value on the size of misstatement or omission that qualifies as an error in materiality. Nevertheless, in reaching judgment on specific cases, auditors and courts have utilized several "rules of thumb."

• On an income statement, an omission or error greater than 5% of Profit (before tax), or greater than 0.5% of sales revenues is more likely to be considered "large enough to matter."
• On a balance sheet, a questionable entry more than 0.3 to 0.5% of total assets or more than 1% of total equity, is more likely to be viewed suspiciously.

The final judgment on a suspected materiality abuse, however, will also consider factors besides the magnitude of the error. Auditors and courts will also consider

1. Motivation and intent behind the error 
   If the intent is to keep stock prices artificially high, inflate reported earnings, or inappropriately influence merger / acquisition decisions, for instance, an abuse judgment is more likely.
2. The likely effect on user perceptions and judgment.
   An accounting statement error with large "Indirect manufacturing labor expenses and overhead expenses" misclassified as "Direct manufacturing labor" might not be seen as materiality abuse, since both kinds of expense contribute to cost of goods sold and the gross profit / gross margin result is the same regardless of which category has the labor in question.
   
   A statement with the same large expenses misclassified below the gross profit line under Operating Expenses instead of above the gross profit line, would more likely be seen as fraudulent because the misstatement does inappropriately improve gross profits

Paid In Capital

Read more: http://www.investopedia.com/terms/p/paidincapital.asp#ixzz2Eu46QXyl   Definition of 'Paid In Capital' The amount of capital "paid in" by investors during common or preferred stock issuances, including the par value of the shares themselves. Paid in capital represents the funds raised by the business from equity, and not from ongoing operations. Paid in capital is a company balance sheet entry listed under stockholder's equity, often shown alongside the balance sheet entry for additional paid-in capital. It may also be referred to as "contributed capital".

Investopedia explains 'Paid In Capital' Paid in capital can be compared to additional paid in capital, and the difference between the two values will equal the premium paid by investors over and above the par value of the shares. Preferred shares will sometimes have par values that are more than marginal, but most common shares today have par values of just a few pennies. Because of this, "additional paid in capital" tends to be representative of the total paid-in capital figure, and is sometimes shown by itself on the balance sheet.

http://www.accountingcoach.com/online-accounting-course/17Xpg03.html#paid-in-capital


Capital stock is a term that encompasses both common stock and preferred stock. "Paid-in" capital (or "contributed" capital) is that section of stockholders' equity that reports the amount a corporation received when it issued its shares of stock.

State laws often require that a corporation is to record and report separately the par amount of issued shares from the amount received that was greater than the par amount. The par amount is credited to Common Stock. The actual amount received for the stock minus the par value is credited to Paid-in Capital in Excess of Par Value.

To illustrate, let's assume that a corporation's common stock has a par value of $0.10 per share. On March 10, 2012, one share of stock is issued for $13.00. (The $13 amount is the fair market value based on supply and demand for the stock.) The accountant makes a journal entry to record the issuance of one share of stock along with the corporation's receipt of the money (note that the "Common Stock" account reflects the par value of $0.10 per share):

Date	Account Name		Debit	Credit
March 10, 2012	Cash		13.00
		Common Stock		0.10
		Paid-in Capital in Excess of Par Value		12.90

While some states require a par value for common stock, other states do not. If there is no par value, some states require a "stated value." If this is the case, the entry will be the same as the above except that the term "stated" will be used in place of the term "par":

Date	Account Name		Debit	Credit
March 10, 2012	Cash		13.00
		Common Stock		0.10
		Paid-in Capital in Excess of Stated Value		12.90

If a state does not require a par value or a stated value, the entire proceeds will be credited to the Common Stock account:

Date	Account Name		Debit	Credit
March 10, 2012	Cash		13.00
		Common Stock		13.00

Generally speaking, the par value of common stock is minimal and has no economic significance. However, if a state law requires a par (or stated) value, the accountant is required to record the par (or stated) value of the common stock in the account Common Stock.

cash surrender value

The amount that the insurance company will pay on a given life insurance policy if the policy is cancelled prior to the death of the insured

 

 Read more: http://www.investopedia.com/terms/c/cashsurrendervalue.asp#ixzz2EtyCcEpT

Definition of 'Cash Surrender Value' The sum of money an insurance company will pay to the policyholder or annuity holder in the event his or her policy is voluntarily terminated before its maturity or the insured event occurs. This cash value is the savings component of most permanent life insurance policies, particularly whole life insurance policies. Also known as "cash value", "surrender value" and "policyholder's equity".

Investopedia explains 'Cash Surrender Value' Cash surrender value applies to the savings element of whole life insurance policies that are payable before death. However, during the early years of a whole life insurance policy, the savings portion brings very little return compared to the premiums paid.

working capital

Read more: http://www.investopedia.com/terms/w/workingcapital.asp#ixzz2Etvsh3pI
 Definition of 'Working Capital'

A measure of both a company's efficiency and its short-term financial health. The working capital ratio is calculated as:
 
Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable and inventory).

Also known as "net working capital", or the "working capital ratio".

Investopedia explains 'Working Capital'

If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case scenario is bankruptcy. A declining working capital ratio over a longer time period could also be a red flag that warrants further analysis. For example, it could be that the company's sales volumes are decreasing and, as a result, its accounts receivables number continues to get smaller and smaller.

Working capital also gives investors an idea of the company's underlying operational efficiency. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company's operations.