I decided to write a little bit of advice regarding business processes and terms as part of this blog. Feel free to comment if you have any additions to this.
To see how well a company is doing with managing their long term assets you just need to know where to look.
Some places you can find this is in the reported total assets, net income, and cash flows that are related to the investing activities of a business. An idea of how a company is utilizing long term assets can be found in their financial statements.
A company that is particular good at this just happens to be one of the largest food companies and goes by the name of H.J Heinz <www.heinz.com> or that famous ketchup company. It has close to 66 percent of its total assets are classified as long term assets. The income statement comes in handy because it displays depreciation of assets over time, and Heinz has had about 299 million dollars worth of depreciated expenses.
Long term assets are constantly looked at to see if some of the assets have loss some of its value which will result in what is known as asset impairment.
Getting rid of long term assets could show an increase or decrease on the income statement, it just depends on the situation.
So, long term assets are classified as assets that have a relatively long life, usually of at least one year.
Second, they are used for the operation of a business, and third, they are not usually resold. In the pass years long term assets were usually referred as fixed assets, but this statement is not correct today because fixed usually apply to something that lasts forever. There is no really set in stone rule to classify a long term asset, but they are usually thought of to last for at least one year with repetitive use. Assets that are not normally used in the everyday operations of a business should not be included in this category, and assets that are available for resale should be called inventory. Also, assets are different from current assets because they are expected to aid a business for longer periods of time, and are used in the day to day operating cycle of an entity.
A very important part of long term assets are its carrying value, or the part of the price of an asset that hasn’t expired yet. It is also known as the book value of an asset. If a long term asset just happens to lose part or all of its money producing potential before the end of its self life than the carrying value is reduced.
Asset impairment occurs when the cash flow of the asset ends up being less then the carrying value. When the carrying value is reduced then it is counted as a loss. Long term assets can be further broken down into three distinct items. They are tangible assets, natural resources, and intangible assets.
A tangible asset is a type of long term asset that is physical like land, buildings, and equipment.
Natural resources are a type of long term assets that is exchanged for economic value and can be obtained from the land, like gas, gold, and ore.
Last a intangible asset is an type of long term asset that doesn’t have any physical worth but have a value based on the rights that is granted to the owner. An example of this is copyright, patent, and trademarks. The way that tangible assets loses value is through depreciation, the way that natural resources lose value is through depletion, and the way that intangible assets loses value is through amortization. Picking long term assets are a very concrete and intricate process. Before choosing a long term asset the management must decide how they will finance an asset one they have it. Companies that generate enough profit can pay for long term assets from the cash flow of their day to day operations. It’s very similar to how an individual pays for the loan of a car or the loan on mortgage.
When companies want issue a long term acquisition then they must do this through capital stock, bonds, or long term notes. A nice place to analyze a company’s long term financing is through the financing activities in the statement of cash flow. When you’re dealing with long term assets you must make sure that you’re using the matching rule appropriately.
The first thing you should do is find the total expense in the current accounting period. Second, you should see how much money is retained from the on the balance sheet to see if the asset will be beneficial in the future.
To solve these dilemmas there should be four important questions that you ask yourself. First, how is the value of the long term asset determined? Second, how much the depreciated value of the long term asset should be allocated against the revenues in the long run. Third, how much money on expenditures such as repairs is use? Last, how would the disposal of the long term asset is recorded in the financial records? Because long term assets are very confusing, they have many alternatives to manage them. It’s best to think of long term assets as something that will provide a particular need or operation over the years.
For example, you shouldn’t think of a truck on how long it will run, but on how many miles it will drive. Another example is how much paper a photocopier machine will copy, and how many people a hotel will shelter. It’s also important to determine if a business will have the money to finance the asset in the future. Expenditure is known as the payment or a promise to make a payment in the future for an asset such as for a payment of a service or for a new laser printer you purchased for your business.
There are two types of expenditures, and they are capital expenditures and revenue expenditures.
- A capital expenditure refers to the expenditure of a long term asset like land for example.
- Revenue expenditure refers to the expenditure for something related to repair or maintenance such as the repair of a bulldozer for a construction company.