Accounting for Capital Assets John recently came into a sum of money from an inheritance and is contemplating purchasing

a small manufacturing facility in his home town. Not knowing much about running a business, he decided to have lunch with some of the other businesspeople in town. John listened attentively to the discussion around the lunch table, which focused on operating assets and the importance of using them efficiently in order to maximize profits. As John reflected on the lunch meeting, he realized that he had some unanswered questions concerning operating assets. John's questions are as follows: 1. What methods are used to allocate the cost of operating assets and how do I know which one to choose for a particular operating asset? 2. How do I determine if I am using my operating assets efficiently to generate a profit? 3. How do I evaluate and determine an appropriate balance between equity and debt financing as I acquire operating assets? As you reflect on John's questions, develop an initial post and then respond to the posts of at least two other students. LaTasha Hello Everyone The first thing to do is to commend John on his decision to have lunch with other business people in his town. This certain gave him an opportunity to ask questions pertaining to running a business and obtain some helpful advice. Operating assets includes items such as cash, inventory, property, plant and equipment. When it comes to operating assets there are several different methods that you can use to allocate the cost of operating assets. The use of the depreciation method will help John to allocate the cost of operating assets. If John, is looking for something where the depreciation dollar amount is the same for each of asset that is recorded, than he should use straight-line method. If he is looking for a method where depreciation is based on the amount units the asset produces, then he should use units-of-production. He can also choose to use accelerated depreciation or double-declining balance method. Keep in mind to explain to John that accelerated depreciation records high amount of depreciation in the beginning of the year and record lower amount at the towards the end of the year. When using double-declining balance method depreciation is twice the straight line rate, but the balance is reduce each period (Porter & Norton, 2011). A balance sheet would give John a clue on whether or not he is using his operating assets to generate a profit efficiently. One particular area he should pay close attention to on the balance sheet is the asset turnover ratio. According to Porter & Norton (2011) this ration is a measure of how many dollars of asset

are necessary for every dollar of sales. Asset takes your company net sales and divided it by them by the average total assets. Although lenders and investors use the debt to equity ratio, I am pretty sure that John can use this method to know whether or not if there is an appropriate balance between equity and debt financing. Debt to equity ratio would measure the Johns company ability to survive in the long term. In other words it measures the companys solvency. Debt to equity ratio takes your total liabilities and divides them by your total equity (Porter & Norton, 2011). John Toal The first thing to assist John with operating assets is to give him a definition of operating assets, what he is looking at within the company; Operating assets constitute the major productive assets of many companies. Current assets are important to a companys short term liquidity, but operating assets are absolutely essential to its long-term future. These assets must be used to produce the goods or services the company sells to customers Porter & Norton 2010, pp.364). Now he has an explanation of operating assets, we can give him suggestions as where to look for his questions. 1. Depreciation is the process of allocating the cost of long-lived plant assets other than land to expense over the assets estimated useful life (cliffnotes.com, n. d. pp.1). Before some of the depreciation methods, John should understand some terms such as; salvage value, depreciation cost, useful life, and net book value. Once he understands the terms he can evaluate the types of depreciation that can be used such as; straight-line, units-of-activity, and declining balance depreciation , the most commonly used depreciation is the straight line method. 2. Asset turnover informs an investor/owner the total sales compared to each $1 of assets, the return on assets (ROA) will inform the same owner/investor the amount of profit a company generates for each dollar in assets.Return on assets as a measure of asset intensity. The lower the profit per dollar of assets, the more asset-intensive a business is (about.com n. d., pp.1). This is a good method to determine the cost of operating assets. 3. To determine an appropriate balance between equity and debt financing and operating assets, would be to use a debt-to asset ratio.This ratio provides a way for analysts to use the balance sheet against other companies. A company with a higher debt financing will have a higher debt-toasset ratio (ehow.com n. d., pp.2). Similarly, a company that has a decrease in debt financing has a lower debt-to-asset ratio which shows financial strength. References: Depreciation of Operating Assets, n. d. Retrieved from: http://www.cliffsnotes.com/study_guide/Depreciation-of-OperatingAssets.topicArticleId-21081,articleId-21076.html How the Balance Sheet is Affected by Debt Financing, n. d. Retrieved from: http://www.ehow.com/info_8487882_balance-sheet-affected-debt-financing.html

Kennon, K., n. d. Investors for Beginners-Return on Assets (ROA). Retrieved from: http://beginnersinvest.about.com/od/incomestatementanalysis/a/returnon-assets-roa-income-statement.htm Porter, G. & Norton, C. (2010).Using Financial Accounting Information: The Alternative to Debitsand Credits. South-Western Cenage Learning, Mason, OH.