Quiz 9: Long Term Assets: Fixed and Intangible


Fixed Asset Turnover Ratio It is the ratio which represents the proportion of average Book-Values (B.V) of fixed assets involved in sales generation during the particular year. Therefore, this ratio depends on the two major components i.e. fixed assets and sales. The determined values for sales and assets will vary for different years which results into variation in the ratio. In the present situation, Company A is a retailer who is selling its products by using the internet media only. And company N plays the role of network provider over internet. Therefore, both of the companies are rivalries in the digital world.Table: Financial information of both companies for the current year as given. img The above table shows the levels of sales and average B.V of the fixed assets of two companies A and N. A Calculation for Fixed Asset Turnover Ratio (FATR) can be done by using the formula as given below. img By putting the values for both A and N Companies this ratio (round up to one decimal) will be computed as under. img Hence, the ratio for company A is img img Hence, the ratio for company N is img B On the basis of the comparison of the FATR ratio, Company N has utilized its fixed assets more efficiently to maximize its sales generating activity. As company N stands at 38.8 whereas the company A stands at only 6.4, which indicates its low level of efficacy. While company A holds higher value of fixed assets than the other company, still the comparative level of sales is low. Hence, it can be concluded that the Company N is working more efficiently. C As being rivalries in the business of data transmission over internet, both are providing services to the consumers for creation of their market space. Sales can only be maximized by tracking the assets to achieve maximum benefits from them. By initiating the practices of proper management and maintenance of assets, the output level can be increased and simultaneously by using effective strategies of marketing can increase the level of sales. Therefore, the conclusion can be derived from the ratio which indicates the better condition of sale generation level via using fixed assets i.e. achieved by company N more effectively.

Straight-line depreciation This depreciation is the value which assumes the constant wear-tear loss of assets over its useful life. It is the form of expense that is charged on the cost of asset by the business units. It provides the simplest way to match expenses with revenue earned from the asset used in the normal course of the business. In the present case, the book-value of the building is $1,450,000; estimated useful life is 10 years with $300,000 as its residual value. A Depreciable cost: It is the cost that represents the difference between the cost of the asset and its salvage value. The resultant amount will show the cost for which the depreciation expenses that need to be calculate. So, the depreciable cost would be determined by using the formula as given below. img Hence, it is concluded that the depreciable cost is img B Straight-line rate: It shows the rate of depreciation which remains same for each of the accounting period. It represents the assumed speed of usage of an asset during the normal operations of the business unit. It is usually denoted in percentage value. So, the rate by this method can be computed by putting the values in the formula as given under. img Hence, it is concluded that the rate of straight-line method is img C Annual straight-line depreciation: This depreciation is the value which assumes the annual reduction in the value of assets equally throughout its useful life. It can be determined by dividing the depreciable cost to estimated useful life of the asset which is shown as below. img Hence, it is concluded that the annual depreciation is img

a. Fixed assets are the assets that normally last for one year and are used in the normal operation. Here, O'Neil office supplies is holding automobiles trucks for normal operation and doesn't intend to sell them in short run. Hence, they shall be classified as fixed assets. b. Inventory is the current asset that is held by a company for selling to customers to earn revenue. Here, Collins Auto Sales co is holding automobiles trucks for sale and this is the core activity of the company. Hence, they shall be classified as inventory.