Plant Asset Disposals, Natural Resources, and Intangible Assets
This chapter details the events that need to be dealt with when disposing assets. There are balance sheet and income statement entries that must be recorded when getting rid of equipment by scrapping it or selling it. It also discusses intangible assets, how to record them, and how to account for their diminishing value. Many business entities will eventually have to dispose of a plant asset. When this happens, the company will either have a loss or show a gain depending on the difference between the asset's sale price and its book value. You will learn the journal entries for a variety of situations, including a gain on the sale of an asset, a loss on the sale of an asset, how to realize loss, and what to do when a fire or flood that destroys an asset.
Analyzing and using the financial results - Total assets turnover
In determining the productivity of assets, management may compare one year's assets turnover ratio to a previous year's. Total assets turnover shows the relationship between the dollar volume of sales and the average total assets used in the business. To calculate this ratio:
Discussion of testing for impairment is beyond the scope of this text. For more information on such testing see SFAS No. 142. 10 SFAS No. 142. par. 18.
This ratio indicates the efficiency with which a company uses its assets to generate sales. When the ratio is low relative to industry standards or the company's ratio in previous years, it could indicate an over-investment in assets, a slow year in sales, or both. Thus, if the ratio is relatively low and there was no significant decrease in sales during the current year, management should identify and dispose of any inefficient equipment.
The total assets turnover in a recent year for several actual companies was as follows:
|
Total Assets ($ thousands) |
|||||
|
Company |
Net Sales |
Beginning of Year |
End of Year |
Average |
Turnover |
|
($ thousands) |
|
||||
|
Procter & |
$ 39,244,000 |
$ 34,366,000 |
$ |
$ |
109.41% |
|
Gamble |
|
37,374,300 |
|
35,870,150 |
|
|
Tyco |
28,931,900.00 |
32,344,300.00 |
|
36,374,300 |
79.54% |
|
International |
|
40,404,300 |
|
|
|
|
Kimball |
1,261,171 |
723,651 |
678,984 |
701,318 |
179.83% |
|
International |
|
|
|
|
|
These three companies compete in very different industries. However, they are all manufacturers. To see if each of these companies is performing above standard, management should compare its company's percentage to the industry's standard. In addition, calculating this ratio over approximately five years would help management see any trends indicating problems or confirm successful asset management.
This chapter concludes your study of accounting for long-term assets. In Chapter 12, you learn about classes of capital stock.