Page 425 - Accounting Principles (A Business Perspective)

10. Property, plant, and equipment

Reed Company
Partial Balance Sheet
2010 June 30
Property, plant, and equipment
Land $ 30,000
Buildings $ 75,000
Less: Accumulated depreciation 45,000 30,000
Equipment $ 9,000
Less: Accumulated depreciation 1,500 7,500
Total property, plant, and equipment $ 67,500
Exhibit 87: Partial balance sheet

An accounting perspective:

Business insight

In their financial statements, companies often provide one amount for property, plant, and
equipment that is net of accumulated depreciation. Nonetheless, notes (footnotes) actually provide

the additional information regarding the separate types of assets. The Limited, Inc. is a world
leader in the design and distribution of numerous lines of women's and men's clothing. For
instance, its 2001 Feb 3, balance sheet showed property, plant, and equipment, net, equal to USD
1,394,619. In a note to the financial statements (slightly modified to clarify), management
explained this amount as follows:
(Dollar amounts in thousands)

Property and Equipment, Net
Property and Equipment, at cost 2000 1999
Land, buildings and improvements $ 362,997 $ 390,121
Furniture, fixtures and equipment 2,079,567 2,020,651
Leaseholds and improvements 655,736 498,232
Construction in progress 46,748 35,823
Total $3,145,048 $2,944,827
Less: accumulated depreciation and amortization 1,750,429 1,715,215
Property and equipment, net $1,394,619 $1,229,612
A misconception Some mistaken financial statement users believe that accumulated depreciation represents
cash available for replacing old plant assets with new assets. However, the accumulated depreciation account
balance does not represent cash; accumulated depreciation simply shows how much of an asset's cost has been
charged to expense. Companies use the plant asset and its contra account, accumulated depreciation, so that data
on the total original acquisition cost and accumulated depreciation are readily available to meet reporting

requirements.
Costs or market values in the balance sheet In the balance sheet, firms report plant assets at original cost
less accumulated depreciation. One of the justifications for reporting the remaining undepreciated costs of the asset
rather than market values is the going-concern concept. As you recall from Chapter 5, the going-concern concept
assumes that the company will remain in business indefinitely, which implies the company will use its plant assets
rather than sell them. Generally, analysts do not consider market values relevant for plant assets in primary
financial statements, although they may be reported in supplemental statements.

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