Page 432 - Accounting Principles (A Business Perspective)

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Item Dell Precision M40 Insurance coverage:
Id. No. Z-43806 United Ins. Co.
Location Rm. 403, Adm. bldg. Pol. No. 0052-61481-24
Date acquired 2009 Jan. 1 Amt. $3,000
Cost $3,000 Repairs:
Estimated salvage value $200 2010/6/13 $140
Estimated useful life 4 yrs.
Deprecation per year $700
Accumulated depreciation: ' Disposal date
2009/12/31 $ 700 Gain or loss
2010/12/31 1,400
2011/12/31
2012/12/31
Exhibit 91: Detailed record of a specific plant asset
DEMENT & PEERY, INC.
Consolidated Balance Sheets
2010 December 31 and 2009 (Dollars in millions)
2010 2009
ASSETS
Current Assets:
Cash $ 121 $ 192
Accounts receivable, net of allowance for doubtful accounts of $15 in both 2010 and 2009 379 491
Inventories 247 175
Deposits, prepaid expenses and other 120 58
Total Current Assets $ 867 $ 916
Investments
Equity affiliates 170 277
Other assets 87 63
Property and Equipment - Net 4,153 3,919
Deferred Charges 164 154
Total Assets $5,441 $5,329
Net Operating Earnings $ 560 $ 433
Exhibit 92: Consolidated balance sheets

Analyzing and using the financial results—Rate of return on operating assets
Analyzing the ratios of income statement and balance sheet items from one year to the next can reveal important
trends. Management uses these ratios to measure performance by establishing targets and evaluating results. As an
example, look at Exhibit 92. Analysts use these figures to calculate the ratios and to explain the importance of this
information to management and investors.

To determine the rate of return on operating assets for Dement & Peery for 2009 and 2010, use the
following formula:
Netoperatingincome
Rateof return on operatingassets=
Operatingassets
2009: USD 433,000/USD 5,329,000 = 8.13 per cent

2010: USD 560,000/USD 5,441,000 = 10.29 per cent
Net operating income is also called net operating earnings or income before interest and taxes. In calculating
Dement & Peery's ratio, we have assumed that all assets are operating assets used in producing operating revenues.
This ratio measures the profitability of the company in carrying out its primary business function. For Dement &
Peery, these figures indicate a slight increase in the earning power of the company in 2010. Net operating income
increased more than proportionately compared to the increase in operating assets. Perhaps this performance
justifies the increase in operating assets.

In this chapter, you learned how to account for the acquisition of plant assets and depreciation. The next chapter
discusses how to record the disposal of plant assets and how to account for natural resources and intangible assets.

Accounting Principles: A Business Perspective 433 A Global Text