1. Explain the meaning of the terms “fixed assets” and “current assets”, illustrating your explanation with suitable examples (about 200 words).
A fixed asset refers to the things that directly play a major contributor role in the company’s capacity. These items within the company cannot be easily or directly translated into cash. It is also defined as the asset that cannot be directly sold to the company’s end user or consumer. For instance, within a software producing company, the fixed assets could include the premises in which the company is housed as well as the computer hardware components that are used in the software development.
On the other hand, current assets refers to the company assets that is listed on the balance sheet that has the possibility of being converted into either cash or used in the settlement of the company’s current liabilities within a time period of twelve months. Current assets comprise the company’s items that have monetary value and can be sold, bought or produced within the time period that the company is in business. Examples of current assets include the available stock of components that are brought in by the company, the finished products of the company that are in stock can also be classified as current assets. Further, cash equivalents, liquid cash, investments that are considered short term, receivable accounts, the inventory and any other prepaid liabilities bound to be paid within the year, can also be considered as current assets of the company (Cresswell,2004).
2. Describe how the two types of assets are valued for balance sheet purposes, using the following assets owned by a company that writes and sells software packages (about 500 words):
a. The company has a stock of 500 user manuals for version 1 of a package—version 2 of which is to appear shortly. The company paid $5,000 to have 1,000 manuals printed and has been selling them at $25 per copy.
b. The company has a file server costing $15,000 that is used by the software development teams.
Valuation of the company assets estimates the worth of the company assets and the viability of the company. The items valued usually include items that are assets or liabilities to the company. In this case the valuations were done on the company assets that were the software versions that the company developed for release. The valuation conducted was to provide an investment analysis of the company. This was to help in ascertaining whether the company’s continual production of the software product was a viable business operation that would sustain the company. The net realizable value method was used in the valuation process. This process evaluates the worth of the asset as is held in the inventory. This method was chose as it does not understate or overstate the net value of the product held in the inventory.
The current assets are normally valued at the lower realizable value as well as the lower cost price. In this case the cost price referred to the cost of production of the software product. The cost of the user manuals in stock was £2,500, as is indicated.
The cost spent on acquisition of a fixed asset depends on the assets useful economic life. The useful economic life of an asset refers to the time period within which the asset is viable and continues to give profitable input to the company processes (Why Total Cost, 2003). In order to do this, we will be required to lower the asset value each year by a constant value termed as the depreciation value. Depreciation value refers to the value by which the asset value goes down each year. This value is calculated gradually depreciatively until the value of the asset retrogresses to zero. This will happen at the end of the asset’s useful economic life. Consequently, the original cost is not included to the account of profit and loss but in its place, the value of depreciation is charged. In order to calculate the value of depreciation, several means can be used such as the straight line method, the written down value method, the activity method as well as the annuity method. In this case, the straight line method was used due to its simplicity. In this case the useful economic life of the asset is N years, and the depreciation experienced in each of the years is 1/N of the original cost.
The file server is considered as a fixed asset and its useful economic life can be estimated to be 3 years. The depreciation value that will be experienced is therefore £15000/3= £ 5000. Consequently, the value of the file server at the end of the year would be (£15000-£5000) = £10000, at the end of the second year, its value would have depreciated to £5000 and finally to zero in the third year (total cost of ownership).
REFERENCES
CRESSWELL, A. (2004). Return on Investment In Information Technology: A Guide for Managers [Online]. Center for Technology in Government, University at Albany, SUNY Retrieved from:http://www.ctg.albany.edu/publication/guides/roi?chapter=4§ion=1
Retrieved on: 9 May 9, 2012
TOTAL COST OF OWNERSHIP [Online]. (n.d.) Technology Research for Business Professionals.
Retrieved from : http://www.findwhitepapers.com/enterprise-applications/total-cost-of-ownership
Retrieved on: 9 May 2012.
WHY TOTAL COST OF OWNERSHIP (TCO) MATTERS [Online] (2003). Gartner. Retrieved from:
https://k12tco.gartner.com/home/homeagepromo/files/TCO.Overview.pdf
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