Capital Assets

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CHAPTER
9
Chapter 9 CAPITAL ASSETS
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GOODWILL

• Goodwill is the value of all the favourable
  attributes that relate to a company.
• Goodwill includes exceptional management, a
  desirable location, good customer relations,
  skilled employees, high quality products etc.
• Unlike equipment account, which can be sold
  individually, goodwill can not be sold
  individually.
• Only when the entire business is sold, goodwill
  will be sold as well.
• Goodwill equals the excess of cost over the fair
  market value of the net assets acquired. In
  other words,
• Goodwill Selling price (of business) OE

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GOODWILL

• Putting a number of goodwill account is very
  subjective, so normally, goodwill is recorded
  only when there is a purchase of an entire
  business. Only at this point, it is possible to
  do an independent valuation.
• Goodwill is not written off as it has an
  unlimited useful life. It must be tested
  regularly for impairment.
• Because of its nature, goodwill account requires
  a write-down (due to impairment loss) more often
  than any other type of intangible asset.

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GOODWILL

• Example question which can potentially show up on
  the final exam.
• Buyer pays 1Million dollar on May ,2014.
• Mr. Parks accounting firm has the following
  assests
• Total Assets 500,000
• Total Liability 300,000
• OE ?
• Goodwill ?
• Solution OE 500,000 300,000 200,000
• Goodwill 1 million 200,000 800,000

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FINANCIAL STATEMENT PRESENTATION of Intangible
Assets

• CKSS
• Balance Sheet
• December 31, 2013
• Assets
• Rental equipment (note 4) 90,348
• Property, plant and equipment (note5) 68,959
• Intangible assets 7,355
• Goodwill 121,378
• Note The Goodwill value is derived from the
  selling price OE, when the owner purchased this
  business from seller.

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FINANCIAL STATEMENT PRESENTATION

• In the balance sheet, property, plant and
  equipment, natural resources are often combined
  and reported in the balance sheet as Property,
  Plant and Equipment or capital assets or
  fixed assets.
• Intangible assets are normally listed separately,
  after PPE.
• Goodwill must be disclosed separately from the
  intangible assets.
• There should be disclosure of the balances in the
  major classes of assets and accumulated
  amortization of major classes of assets or of
  assets in total.

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FINANCIAL STATEMENT PRESENTATION

• The amortization methods used should be described
  and the amount of amortization expense for the
  period disclosed in disclosure note.
• Their impairment policy must also be disclosed in
  the notes to the financial statements.
• Impairment losses should be shown on a separate
  line on the income statement.
• Note 4 discloses the cost, accumulated
  amortization and net book value of the rental
  equipment.
• Note 5 discloses the cost, accumulated
  amortization and net book value of the companys
  property, pant and equipment.

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ASSET TURNOVER RATIO

• The following two ratios assess the profitability
  of total assets.
• Asset turnover ratio shows how efficiently a
  company uses its assets to generate sales.
• This ratio shows how much dollars of sales are
  generated by each dollar which is invested in
  assets.
• When we compare two companies in the same
  industry, the one with the higher asset turnover
  is operating more efficiently. the higher the
  better

Net Average Assets Sales Total
Assets Turnover
?

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Asset Turnover Ratio

• Samsung vs Apple If Samsungs Average Total
  Asset and Apples ATA are the same number, (100
  M) but Samsungs net sales is 10 M whereas
  Apples net sales is 8 M. Which company has a
  higher asset turnover? Which company is
  operating more efficiently?
• If Dells net sales and HPs net sales are 5M.
  Dells Average Total Asset is 20M whereas HPs
  ATA is 50M. Then Which company is operating
  more efficiently?

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RETURN ON ASSETS

• The return on assets ratio measures overall
  profitability.
• This ratio indicates the amount of earnings which
  is generated by each dollar invested in assets.
• A high return on assets number indicates a
  profitable company. the higher the better
• The ratio that shows the profitability of assets
  used in the earnings process is the return on
  assets.
• As with other ratios, the return on assets should
  be compared to previous years, to other companies
  in same industry and to industry averages.

Net Average Return
on Income Total Assets Assets

?
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Classwork / Homework

• P500 E9.11, E9.12 (parts which deal with
  Goodwill)
• P501 E9.13 and E9.14
• P506 P9.11 (optional) and P9.13 (optional)