Corporate Finance For Dummies. Michael Taillard

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      A company may choose to leave out the gross PPE line because it doesn’t contribute anything to the value of the total assets (and because you can calculate it easily, given the other information listed).

      What follows are two of the most common methods for calculating depreciation.

      Straight-line and unit-of-production depreciation

      The easiest type of depreciation to use is called straight-line depreciation. Straight-line depreciation is cumulative, meaning that if you report a value in depreciation for a piece of equipment one year, that same amount gets added to the next year’s depreciation, and so on, until you get rid of the equipment or its value drops to 0.For example, if you buy a piece of equipment for $100 and each year it has a depreciation of $25, then you’d report $25 of accumulated depreciation the first year and $50 of accumulated depreciation the next year, while PPE value would go from $100 the first year to $50 the next.

      A similar type of depreciation, called unit-of-production depreciation, replaces years of usage with an estimated total number of units that the equipment can produce over its lifetime. You calculate the depreciation each year by using the number of units produced that year.

      SUM OF YEARS DEPRECIATION

The sum of years method for calculating depreciation applies a greater value loss at the start of the equipment’s life and slowly decreases the value loss each year. This method allows companies to take into account the marginally decreasing loss of value that most purchases go through.

      To see what I mean, imagine that you’re buying a new car. Unless you get into an accident or otherwise damage the vehicle, the car itself will never lose as much value during its lifetime as it does in the first year. By the time the car is 10 years old, it will have lost most of its value, but it won’t be losing its value as quickly each year.

      So if you purchase a piece of equipment for $100,000 and it’s supposed to last for five years with a salvage value of $10,000, then the first year’s depreciation would look like this:

      The first year represents

of the total depreciation that the equipment will go through. The next year is

(in this case, $24,000), the next year is

, and so on.

      Intangible assets

      Intangible assets are things that add value to a company but that don’t actually exist in physical form. Intangible assets primarily include the legal rights to some idea, image, or form. Here are just a few examples:

       The big yellow M that McDonald’s uses as its logo is worth quite a bit because people recognize it worldwide. Imagine if McDonald’s simply gave that M, which it calls the “Golden Arches,” away to another restaurant. How much business would it attract?

       The curved style of the Coca-Cola bottles, as well as the font of the words Coca-Cola, are worth a lot of money because, like the Golden Arches, they’re easy to recognize across the globe.

       For pharmaceutical companies, owning the patent to some new form of medication can be worth quite a lot even if they’re not producing the medicine yet simply because the patent gives them the right to produce that medicine while simultaneously restricting other businesses from producing the same thing.

None of these examples can be physically touched, but they contribute to the value of the company and are certainly considered long-term assets.

      Other assets

      Any assets that a company hasn’t otherwise listed in the assets portion of the balance sheet go into an all-inclusive portion called other assets. The exact items included can vary quite a bit depending on the industry in which the company operates.

Learning about Liabilities

      Liabilities include those accounts and debts that a company must pay back. СКАЧАТЬ