Lecture Notes: Chapter 8 – Reporting and
Interpreting Property, Plant, and
Equipment; Intangibles; and Natural
Resources
Based on Financial Accounting, 11th Edition by Libby, Libby, and Hodge
Introduction
Long-lived productive assets—such as buildings, equipment, patents, and natural resources—
form the backbone of a company's operating capacity. They are used over multiple periods and
are key to revenue generation. This chapter explores the classification, acquisition, use,
depreciation, disposal, and financial reporting of these assets. It also explains how these assets
influence cash flows and performance metrics like the fixed asset turnover ratio.
1. Understanding Long-Lived Productive Assets
Definition & Classification
Long-lived productive assets are assets a company intends to use for more than one accounting
period. They are not intended for resale and include:
Tangible Assets (PP&E): Land, buildings, machinery, vehicles.
Intangible Assets: Patents, trademarks, copyrights, goodwill.
Natural Resources: Oil reserves, mineral deposits, timber.
Each class has different accounting treatments, but they all play a role in the generation of long-
term value.
2. Fixed Asset Turnover Ratio
The fixed asset turnover ratio measures how efficiently a company uses its fixed assets to
generate sales.
, Example:
Net sales = $600,000
Beginning net fixed assets = $200,000
Ending net fixed assets = $240,000
Average = ($200,000 + $240,000) ÷ 2 = $220,000
This means the company generates $2.73 in sales for every $1 invested in fixed assets.
3. Applying the Cost Principle to Asset Acquisition
The cost principle states that all costs required to acquire and prepare an asset for use should be
capitalized.
Included Costs:
Purchase price (net of discounts)
Legal fees
Shipping and handling
Installation and setup
Site preparation
Example – Machinery Purchase:
Purchase price: $90,000
Installation: $6,000
Shipping: $2,000
Total cost = $98,000
This full amount is capitalized to the Machinery account.
Maintenance:
Ordinary repairs (e.g., oil changes, small fixes): Expensed as incurred.
Extraordinary repairs/upgrades (e.g., replacing an engine): Capitalized and
depreciated.
Interpreting Property, Plant, and
Equipment; Intangibles; and Natural
Resources
Based on Financial Accounting, 11th Edition by Libby, Libby, and Hodge
Introduction
Long-lived productive assets—such as buildings, equipment, patents, and natural resources—
form the backbone of a company's operating capacity. They are used over multiple periods and
are key to revenue generation. This chapter explores the classification, acquisition, use,
depreciation, disposal, and financial reporting of these assets. It also explains how these assets
influence cash flows and performance metrics like the fixed asset turnover ratio.
1. Understanding Long-Lived Productive Assets
Definition & Classification
Long-lived productive assets are assets a company intends to use for more than one accounting
period. They are not intended for resale and include:
Tangible Assets (PP&E): Land, buildings, machinery, vehicles.
Intangible Assets: Patents, trademarks, copyrights, goodwill.
Natural Resources: Oil reserves, mineral deposits, timber.
Each class has different accounting treatments, but they all play a role in the generation of long-
term value.
2. Fixed Asset Turnover Ratio
The fixed asset turnover ratio measures how efficiently a company uses its fixed assets to
generate sales.
, Example:
Net sales = $600,000
Beginning net fixed assets = $200,000
Ending net fixed assets = $240,000
Average = ($200,000 + $240,000) ÷ 2 = $220,000
This means the company generates $2.73 in sales for every $1 invested in fixed assets.
3. Applying the Cost Principle to Asset Acquisition
The cost principle states that all costs required to acquire and prepare an asset for use should be
capitalized.
Included Costs:
Purchase price (net of discounts)
Legal fees
Shipping and handling
Installation and setup
Site preparation
Example – Machinery Purchase:
Purchase price: $90,000
Installation: $6,000
Shipping: $2,000
Total cost = $98,000
This full amount is capitalized to the Machinery account.
Maintenance:
Ordinary repairs (e.g., oil changes, small fixes): Expensed as incurred.
Extraordinary repairs/upgrades (e.g., replacing an engine): Capitalized and
depreciated.
