Page 467 - Accounting Principles (A Business Perspective)

11. Plant asset disposals, natural resources, and intangible assets

Analyzing and using the financial results—Total assets turnover

In determining the productivity of assets, management may compare one year's assets turnover ratio to a
previous year's. Total assets turnover shows the relationship between the dollar volume of sales and the average
total assets used in the business. To calculate this ratio:
Netsales
Total assets turnover=
Average totalassets
This ratio indicates the efficiency with which a company uses its assets to generate sales. When the ratio is low
relative to industry standards or the company's ratio in previous years, it could indicate an over-investment in
assets, a slow year in sales, or both. Thus, if the ratio is relatively low and there was no significant decrease in sales
during the current year, management should identify and dispose of any inefficient equipment.
The total assets turnover in a recent year for several actual companies was as follows:
Total Assets ($ thousands)
Net Sales Beginning
Company ($ thousands) of Year End of Year Average Turnover
Procter & $ 39,244,000 $ 34,366,000 $ $ 109.41%
Gamble 37,374,300 35,870,150
Tyco 28,931,900 32,344,300 36,374,300 79.54%
International 40,404,300
Kimball 1,261,171 723,651 678,984 701,318 179.83%
International
These three companies compete in very different industries. However, they are all manufacturers. To see if each
of these companies is performing above standard, management should compare its company's percentage to the

industry's standard. In addition, calculating this ratio over approximately five years would help management see
any trends indicating problems or confirm successful asset management.
This chapter concludes your study of accounting for long-term assets. In Chapter 12, you learn about classes of
capital stock.
Understanding the learning objectives
• By comparing an asset's book value (cost less up-to-date accumulated depreciation) with its sales price, the

company may show either a gain or a loss. If sales price is greater than book value, the company shows a gain.
If sales price is less than book value, the company shows a loss. If sales price equals book value, no gain or loss
results.
• When a plant asset is retired from service, the asset's cost and accumulated depreciation must be removed
from the plant asset accounts.
• Plant assets are sometimes wrecked in accidents or destroyed by fire, flood, storm, and other causes. If the
asset was not insured, the loss is equal to the book value. If the asset was insured, only the amount of the loss

exceeding the amount to be recovered from the insurance company would be debited to a loss account.
• In exchanges of nonmonetary assets having commercial substance, the firm records the asset received at
either (1) the stated cash price of the new asset or (if the cash price is not stated) (2) the known fair market
value of the asset given up plus any cash paid.
• In exchanges of nonmonetary assets not having commercial substance, the firm records the new asset at the
book value of the old asset plus the cash paid.

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