Fixed Assets
Intro
This week covers the importance of inventory valuation to the financial statements, the accounting definition of capitalizing fixed assets, and the effect capitalizing has on the financial statements.
Inventory Costing
Inventory costing using the lower-of-cost-or-market (LCM) recognizes the purchase price and market decreases. The negative in using LCM occurs when the market increases above the cost originally paid for a product. The income statement will show a higher gross income when the inventory is set at a lower value.
Estimating Inventory
Companies estimate inventory when impractical to conduct a physical inventory count by using the gross profit percentage and the retail inventory method. The retail inventory method converts retail prices to cost. The different versions of the retail method are last in first out (LIFO) and first in first out (FIFO) and returns slightly different results. It is important for investors to understand the estimation method because the net income differs. Companies conduct physical inventory counts to record shortages, as a result of theft or breakage.
Criteria for Fixed Asset Capitalization The cost and life of an item are part of the criteria for capitalization of fixed assets (buildings, land, and equipment), which are tangible. Items included in the cost of fixed assets are interest and expenditures (delivery costs, upgrades, and modifications). These expenditures occur before the implementation of the asset. According to GAAP, interest should be capitalized when the asset is not generating revenue; only when prepared, modified, or constructed.
Calculating the Costs of Fixed Assets
The calculations of a fixed asset total:
A. Cost of the fixed asset
B. Actual sales tax paid
C. Shipping and delivery fees
D. Installation fees
E. Other miscellaneous fees – Amount paid related to completing the order, such as commissions.
The fixed asset’s estimated life span will be forecasted and
This week covers the importance of inventory valuation to the financial statements, the accounting definition of capitalizing fixed assets, and the effect capitalizing has on the financial statements.
Inventory Costing
Inventory costing using the lower-of-cost-or-market (LCM) recognizes the purchase price and market decreases. The negative in using LCM occurs when the market increases above the cost originally paid for a product. The income statement will show a higher gross income when the inventory is set at a lower value.
Estimating Inventory
Companies estimate inventory when impractical to conduct a physical inventory count by using the gross profit percentage and the retail inventory method. The retail inventory method converts retail prices to cost. The different versions of the retail method are last in first out (LIFO) and first in first out (FIFO) and returns slightly different results. It is important for investors to understand the estimation method because the net income differs. Companies conduct physical inventory counts to record shortages, as a result of theft or breakage.
Criteria for Fixed Asset Capitalization The cost and life of an item are part of the criteria for capitalization of fixed assets (buildings, land, and equipment), which are tangible. Items included in the cost of fixed assets are interest and expenditures (delivery costs, upgrades, and modifications). These expenditures occur before the implementation of the asset. According to GAAP, interest should be capitalized when the asset is not generating revenue; only when prepared, modified, or constructed.
Calculating the Costs of Fixed Assets
The calculations of a fixed asset total:
A. Cost of the fixed asset
B. Actual sales tax paid
C. Shipping and delivery fees
D. Installation fees
E. Other miscellaneous fees – Amount paid related to completing the order, such as commissions.
The fixed asset’s estimated life span will be forecasted and