Through this approach, information about the original cost continues to be available. To reflect that reality, a separate accumulated depreciation account 1 is created to measure the total amount of the asset’s cost that has been expensed to date. As the utility is consumed over time, buildings and equipment do not get smaller they only get older. In reporting property and equipment, the asset does not physically shrink. Prepaid rent balances get smaller each day as the period of usage passes. With a prepaid expense (such as rent), the asset is directly reduced over time as the cost is assigned to expense. Do any significant differences exist between the method of reporting prepaid expenses and the handling of operating assets like machinery?Īnswer: One important mechanical distinction does exist when comparing the accounting for prepayments and that used for property and equipment having a finite life. Question: The basic accounting for property and equipment certainly resembles that utilized for prepaid expenses such as rent and insurance. That is the most likely meaning of the $93 billion figure reported by Wal-Mart. At any point, the reported asset is the original cost less the portion of that amount that has been reclassified to expense. Cost is first recorded as an asset and then moved to expense over time in some logical fashion. This accounting is very similar to the handling of prepaid expenses such as rent as discussed in an earlier chapter. For example, if equipment is used for ten years, all (or most) of its cost is assigned to expense over that period. This expense is recognized systematically each period as the company utilizes the asset to generate revenue. Subsequently, for any of these operating assets that has a finite life (and most assets other than land do have finite lives), the matching principle necessitates that the historical cost be allocated to expense over the anticipated years of service. After the date of acquisition, the reported balance will probably never again reflect fair value. The buyer has voluntarily chosen to relinquish the specified amount of resources to gain the asset. It also serves as the initial figure appearing on the balance sheet for any item classified in this manner. Thus, the cost incurred to obtain property and equipment provides vital information about management policy and decision making. A willing buyer and a willing seller, both acting in their own self-interests, agreed on this exchange price as being satisfactory. The amount sacrificed to obtain land, machinery, buildings, furniture, and so forth can be objectively determined based on an arm’s length transaction. GAAP, the starting basis for the monetary figure to be reported by a company for property, equipment, and other tangible operating assets with a life of over one year (as with inventory and several other assets) is historical cost. In creating financial statements, what is the underlying meaning of the figure reported for property, equipment, and the like? What information is conveyed by the nearly $93 billion balance disclosed by Wal-Mart?Īnswer: According to U.S. Based on sheer size, the information conveyed about this group of accounts is extremely significant to any decision maker analyzing Wal-Mart or other similar companies. This monetary amount was more than twice as large as any other asset reported by this company. On its January 31, 2009, balance sheet, Wal-Mart reports “property and equipment, net” of nearly $93 billion, a figure that made up almost 60 percent of the company’s total assets. These facilities contain a wide variety of machinery, fixtures and the like such as cash registers and shelving. owns thousands of huge retail outlets and supercenters located throughout the United States and many foreign countries.
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