Page 409 - Accounting Principles (A Business Perspective)

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10. Property, plant, and

equipment

Learning objectives
After studying this chapter, you should be able to:
• List the characteristics of plant assets and identify the costs of acquiring plant assets.
• List the four major factors affecting depreciation expense.
• Describe the various methods of calculating depreciation expense.
• Distinguish between capital and revenue expenditures for plant assets.

• Describe the subsidiary records used to control plant assets.
• Analyze and use the financial results—rate of return on operating assets.
A company accountant's role in managing plant assets

Property, plant, and equipment (fixed assets or operating assets) compose more than one-half of total assets in
many corporations. These resources are necessary for the companies to operate and ultimately make a profit. It is
the efficient use of these resources that in many cases determines the amount of profit corporations will earn.
Accountants employed by a company are deeply involved in nearly all decisions regarding the company's fixed
assets, from pre-acquisition planning to the ultimate disposal or sale of those assets. Companies do not view an
asset acquisition as merely a purchase, but as an investment. For example, should your company or client purchase
an airplane to visit clients? Accountants will investigate all the benefits, both financial and intangible, and compare
these benefits to the costs. By determining whether or not the airplane will be a good investment for the company,

the accountant can assist the company in making sound strategic business decisions.
Since these assets are so closely related to profits, good management is required. In accounting terms, a good
return on operating assets is crucial to the success of the corporation. Many corporations have a staff of accountants
whose primary task is to manage operating assets. This task involves making decisions concerning the purchase,
use, and disposal of said assets. Once an asset has been acquired, accountants are responsible for determining the
original value of the asset, the period over which it will extend benefits to the company, and its current market
value while owned by the entity. The accountant must ultimately determine when and how to dispose of such an

asset. The decision can range from trading the asset for a new asset to selling the asset to a salvage dealer.
Recently, The Williams Companies, Inc. had over USD 10 billion dollars in property, plant, and equipment. In
addition, the company also had approximately USD 530 million in commitments for construction and acquisition
of property, plant, and equipment. Managing a portfolio of assets of this magnitude takes both accounting
knowledge and analytical skills. Successful management of these assets can be financially rewarding to both the
company and the accountant.
On a classified balance sheet, the asset section contains: (1) current assets; (2) property, plant, and equipment;
and (3) other categories such as intangible assets and long-term investments. Previous chapters discussed current

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