Fixed Assets explanation on short terms.

Fixed asset

1. Fixed Assets
Prepared by
NermenMansour
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.