Chapter 11 – Counting Capital

Overview

You may be pleased to know that the heavy spreadsheet work is over. From now on, we will use them for much simpler tasks. The next three chapters consider costs. This chapter sets the ball rolling by discussing the way that you account for long-lived assets – property, plant and equipment, as well as intangibles such as patents. The main emphasis is on analysing and understanding the main bookkeeping entries and the broad range of related management issues. We also see how to project capital spending into the future. Assessing investment projects and presenting capital budgets is saved for Chapters 21 and 22.

Mastering capital spending

If you can answer these questions after reading this chapter, go to the top of the class:

• Capital spending – what is it and why is it important? What is and isn’t capital spending? What could be classed as capital spending, depending on the rules?
• What is the difference between depreciation, amortization and depletion?
• How do you book (record) capital spending and (a clue) how do you write off your spending on assets over their useful lives?
• Are acquisition cost, useful life, maintenance costs, residual value and depreciation policy the key things you need to know to be able to write off capital assets?
• What are the main depreciation policies? How do they work?
• Do you need to maintain fixed asset registers and depreciation schedules?
• Why don’t accounting policies create sinking funds to replace expired assets?
• How do you appraise asset values and make inter-company comparisons?
• Why do managers, beanies, accounting regulators, tax authorities, insurance experts and sellers/buyers assess asset values differently?
• What is total cost of ownership? Why is it so important for managers?