Fixed Assets explanation on short terms.
- 1. Fixed Assets Prepared by Nermen Mansour CMA,DIPIFR
- 2. Introduction to Fixed Assets • Definition: • Fixed assets, also known as tangible assets or property, plant, and equipment (PP&E), are long-term assets that a business uses in its operations to generate income. • Importance: • Essential for production processes. • Significant investment for businesses.
- 3. Characteristics of Fixed Assets • Key Characteristics: • Long-term use. • Not intended for sale. • Depreciable (except land). • Significant value.
- 4. Types of Fixed Assets • Categories: • Land. • Buildings. • Machinery and Equipment. • Vehicles. • Furniture and Fixtures. • Examples: • Factory building, delivery trucks, office desks.
- 5. Acquisition of Fixed Assets • Methods of Acquisition: • Purchase. • Lease. • Self-construction. • Trade-ins. • Example: • Purchasing new machinery for $50,000.
- 6. Cost of Fixed Assets • Components of Cost: • Purchase price. • Installation costs. • Freight and handling. • Insurance during transit. • Example: Total cost of a machine includes its purchase price of $10,000, installation cost of $2,000, and freight charges of $500.
- 7. Capitalization vs. Expense • Capitalization: • Recording a cost as an asset. • Expense: • Recording a cost as an expense. • Criteria for Capitalization: • Extends useful life. • Enhances efficiency or capacity.
- 8. Depreciation Overview • Definition: • The systematic allocation of the cost of a fixed asset over its useful life. • Importance: • Reflects the wear and tear of the asset. • Impacts financial statements.
- 9. Depreciation Methods • Straight-Line Method: • Equal expense each year. • Formula: • (Cost - Residual Value) / Useful Life. • Example: • Machine cost: $10,000, Residual value: $1,000, Useful life: 5 years. • Annual Depreciation: ($10,000 - $1,000) / 5 = $1,800.
- 10. Numerical Example of Straight-Line Depreciation • Example: • Asset cost: $20,000. • Residual value: $2,000. • Useful life: 4 years. • Calculation: • Annual Depreciation = ($20,000 - $2,000) / 4 = $4,500.
- 11. Depreciation Methods (Continued) • Declining Balance Method: • Accelerated depreciation method. • Higher expense in earlier years. • Example: Double declining balance.
- 12. Numerical Example of Declining Balance Method • Example: • Asset cost: $15,000. • Useful life: 5 years. • Double declining rate: 40%. • Calculation: • Year 1: $15,000 * 40% = $6,000. • Year 2: ($15,000 - $6,000) * 40% = $3,600.
- 13. Depreciation Methods (Continued) • Units of Production Method: • Based on usage or output. • Formula: • (Cost - Residual Value) / Total Units of Production. • Example: • Machine cost: $30,000, Residual value: $5,000, Total units: 10,000 hours. • Depreciation per hour: ($30,000 - $5,000) / 10,000 = $2.50.
- 14. Numerical Example of Units of Production Method • Example: • Asset cost: $40,000. • Residual value: $4,000. • Total units: 20,000 hours. • Usage in Year 1: 5,000 hours. • Calculation: • Depreciation per hour: ($40,000 - $4,000) / 20,000 = $1.80. • Year 1 Depreciation: 5,000 * $1.80 = $9,000.
- 15. Depreciation Methods (Continued) • Sum-of-the-Years'-Digits Method: • Accelerated depreciation. • Formula: (Remaining Life / Sum of Years) * (Cost - Residual Value). • Example: • Asset cost: $25,000, Residual value: $5,000, Useful life: 5 years. • Sum of years: 5+4+3+2+1 = 15.
- 16. Numerical Example of Sum-of-the-Years'- Digits Method • Example: • Asset cost: $18,000. • Residual value: $2,000. • Useful life: 4 years. • Sum of years: 4+3+2+1 = 10. • Year 1: (4/10) * ($18,000 - $2,000) = $6,400.
- 17. Impairment of Fixed Assets • Definition: • A reduction in the recoverable amount of a fixed asset below its carrying amount. • Indicators of Impairment: • Significant decline in market value. • Changes in technology or market conditions.
- 18. Accounting for Impairment • Steps: • Identify indicators of impairment. • Measure recoverable amount. • Recognize impairment loss if carrying amount > recoverable amount. • Example: • Asset carrying amount: $50,000. • Recoverable amount: $35,000. • Impairment loss: $50,000 - $35,000 = $15,000.
- 19. Revaluation of Fixed Assets • Definition: • Adjusting the carrying amount of a fixed asset to reflect its current fair value. • Revaluation Model: • Increase carrying amount when fair value > carrying amount. • Decrease carrying amount when fair value < carrying amount. • Example: • Asset revalued from $60,000 to $75,000.
- 20. Accounting for Revaluation • Increases: • Credit revaluation surplus in equity. • Decreases: • Debit revaluation deficit in profit or loss. • Example: • Increase in asset value: $10,000 credited to revaluation surplus.
- 21. Disposal of Fixed Assets • Reasons for Disposal: • End of useful life. • Obsolescence. • Sale or exchange. • Example: • Selling a fully depreciated asset for scrap value.
- 22. Accounting for Disposal • Steps: • Remove asset and accumulated depreciation from books. • Record proceeds from disposal. • Recognize gain or loss on disposal. • Example: • Selling an asset with book value of $5,000 for $7,000. • Gain on disposal: $7,000 - $5,000 = $2,000.
- 23. Asset Register and Record-Keeping • Purpose: • Track details of each fixed asset. • Components: • Asset description, acquisition date, cost, depreciation, location. • Example: • Asset register entry for a company vehicle.
- 24. Asset Tagging and Tracking • Methods: • Barcode tags. • RFID tags. • Importance: • Efficient tracking and management of assets. • Example: • Using RFID tags to track machinery in a factory.
- 25. Fixed Asset Turnover Ratio • Definition: • Measures how efficiently a company uses its fixed assets to generate sales. • Formula: • Net Sales / Average Net Fixed Assets. • Example: • Net sales: $500,000, Average net fixed assets: $250,000. • Fixed Asset Turnover Ratio: $500,000 / $250,000 = 2.
- 26. Numerical Example of Fixed Asset Turnover Ratio • Example: • Net sales: $1,000,000. • Beginning net fixed assets: $400,000. • Ending net fixed assets: $600,000. • Average net fixed assets: ($400,000 + $600,000) / 2 = $500,000. • Fixed Asset Turnover Ratio: $1,000,000 / $500,000 = 2.
- 27. Asset Replacement Decisions • Factors to Consider: • Cost of new asset. • Operating efficiency. • Technological advancements. • Example: • Replacing old machinery with new, energy-efficient models.
- 28. Lease vs. Purchase Decisions • Lease: • Lower initial cost. • Flexible terms. • Example: Leasing a company vehicle. • Purchase: • Ownership. • Long-term asset. • Example: Purchasing office equipment.
- 29. Fixed Assets in Financial Statements • Balance Sheet: • Listed under non-current assets. • Income Statement: • Depreciation expense. • Example: • Fixed assets on balance sheet: $1,000,000. • Annual depreciation expense: $100,000.
- 30. Auditing Fixed Assets • Audit Procedures: • Verify existence and condition. • Check valuation and depreciation. • Inspect asset register. • Example: • Physical verification of machinery.
- 31. Fixed Asset Management Software • Features: • Tracking and management. • Depreciation calculations. • Reporting. • Example: • Using software like SAP, Oracle, or QuickBooks.
- 32. Regulatory Requirements • Compliance: • GAAP (Generally Accepted Accounting Principles). • IFRS (International Financial Reporting Standards). • Example: • Complying with IFRS for asset revaluation.
- 33. Case Study: Successful Fixed Asset Management • Company X: • Implemented comprehensive asset management system. • Resulted in 15% reduction in maintenance costs. • Details: • Streamlined asset tracking and maintenance schedules.
- 34. Challenges in Fixed Asset Management • Common Challenges: • Accurate record-keeping. • Depreciation accuracy. • Asset tracking. • Example: • Overcoming challenges with automated tracking systems.