Analysis of Noncurrent Assets in Accounting

Information about the Genesis transactions provided earlier reveals that the company both purchased and sold plant assets during the period. Both transactions are investing activities and are analyzed for their cash flow effects in this section.

Point: Investing activities include (1) purchasing and selling long-term assets, (2) lending and collecting on notes receivable, and (3) purchasing and selling short-term investments other than cash equivalents and trading securities.

Plant Asset Transactions  The first stage in analyzing the Plant Assets account and its related Accumulated Depreciation is to identify any changes in these accounts from comparative balance sheets in Exhibit 16.10. This analysis reveals a $40,000 increase in plant assets from $210,000 to $250,000 and a $12,000 increase in accumulated depreciation from $48,000 to $60,000.
The second stage is to explain these changes. Items b and c of the additional information for Genesis (page 639) are relevant in this case. Recall that the Plant Assets account is affected by both asset purchases and sales, while its Accumulated Depreciation account is normally increased from depreciation and decreased from the removal of accumulated depreciation in asset sales. To explain changes in these accounts and to identify their cash flow effects, we prepare reconstructed entries from prior transactions; they are not the actual entries by the preparer.

Point: Financing and investing info is available in ledger accounts to help explain changes in comparative balance sheets. Post references lead to relevant entries and explanations.

To illustrate, item b reports that Genesis purchased plant assets of $70,000 by issuing $60,000 in notes payable to the seller and paying $10,000 in cash. The reconstructed entry for analysis of item b follows:


This entry reveals a $10,000 cash outflow for plant assets and a $60,000 noncash investing and financing transaction involving notes exchanged for plant assets.
Next, item c reports that Genesis sold plant assets costing $30,000 (with $12,000 of accumulated depreciation) for $12,000 cash, resulting in a $6,000 loss. The reconstructed entry for analysis of item c follows:


This entry reveals a $12,000 cash inflow from assets sold. The $6,000 loss is computed by comparing the asset book value to the cash received and does not reflect any cash inflow or outflow. We also reconstruct the entry for Depreciation Expense using information from the income statement.
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This entry shows that Depreciation Expense results in no cash flow effect. These three reconstructed entries are reflected in the following plant asset and related T-accounts.



This reconstruction analysis is complete in that the change in plant assets from $210,000 to $250,000 is fully explained by the $70,000 purchase and the $30,000 sale. Also, the change in accumulated depreciation from $48,000 to $60,000 is fully explained by depreciation expense of $24,000 and the removal of $12,000 in accumulated depreciation from an asset sale. (Preparers of the statement of cash flows have the entire ledger and additional information at their disposal, but for brevity reasons only the information needed for reconstructing accounts is given.)

Example: If a plant asset costing $40,000 with $37,000 of accumulated depreciation is sold at a $1,000 loss, what is the cash flow? What is the cash flow if this asset is sold at a gain of $3,000? Answers: +$2,000; +$6,000.

The third stage looks at the reconstructed entries for identification of cash flows. The two identified cash flow effects are reported in the investing section of the statement as follows (also see Exhibit 16.7 or 16.11):


The $60,000 portion of the purchase described in item b and financed by issuing notes is a noncash investing and financing activity. It is reported in a note or in a separate schedule to the statement as follows: