Fixed Assets

Fixed assets are large ticket purchases that have an extended utilization with life. They are not typically sold in the due course of business and as such they are allocated via depreciation to the income statement.

Value Investing With Real Estate Investment Trusts – Analysis and Evaluation Techniques

Real Estate Investment Trusts

Real Estate Investment Trusts (REITs) are considered excellent long-term investments. There are two underlying reasons. First, under the Internal Revenue Code, they are considered income tax free investments. To comply, the REIT must distribute at least 90% of all net income earned to shareholders. The shareholders pay income tax on those dividends received. Because of the dividend distribution requirement, REITs have excellent dividend yields. This is why REITs are considered perfect investments for widow and orphan funds whereby cash is necessary to fund the monthly payments to annuitants. Secondly, similar to any real estate investment, time is beneficial to the overall value of the REIT’s fixed assets.

This in-depth article explains these two elements of real estate ownership and how they are applied to publicly traded REITs. The dividend yield formula is covered in detail and how it is applied with REITs due to the every increasing dividend payout REITs generate. Net income is then covered and an actual example is illustrated discussing how to interpret annual and interim income statements REITs provide. There is also an explanation to calculating cash flow related to the income statement. Finally, with regard to the underlying assets of real estate, the fixed assets turnover rate is explained and how it is applied to REITs. There is an expected norm for the turnover rate.

From this information, buy/sell trigger points are covered along with an example for a club member.

Railroad Companies – A Solid and Steady Investment

These six are behemoths when it comes to transportation. All have revenues greater than $2.5 Billion per year and hold at least $4 Billion in fixed assets. The key to this investment is the asset allocation model.  A common thread that binds all of them is that the asset side of the balance sheet is fixed assets intensive. Basically, more than 85% of the assets are fixed in nature. 

Due to this asset structure, there are some business principles every investor should understand because they are applicable to railroad investments. First and foremost is the fixed asset maintenance/upgrade relationship with depreciation expense (allocation of utility value). The next principle is referred to as the break-even point. In general, long life fixed asset driven entities have lower financial break-even points than a traditional company. A third and probably the most influential element of profit for a railroad company is the concept of marginal dollars adding a very high percentage of each marginal dollar of revenue to the profit. The following three sections explain these three principles in more detail related to how they are applied to railroad financials. The final section ties it altogether for the investor as to why railroad investments are a solid and steady investment. Future articles related to this series utilize these three principles when discussing/explaining the respective investment.

Fixed Assets Turnover Rate

Fixed Assets Turnover Rate

The fixed assets turnover rate is another activity ratio whereby an income statement financial characteristic is compared to a balance sheet asset section. In this case, comparing adjusted sales against historical cost of fixed assets. This financial business ratio is only effective for business operations that are fixed asset intensive. With service based industries like carpet cleaning, professional firms and medical practices this particular ratio is impractical.

Bookkeeping – Complex Entries Expanded (Lesson 66)

Complex Entries

A journal entry with multiple lines of entry affecting several different ledgers (accounts) is commonly referred to as a complex entry. Many bookkeepers shy away from them as they feel intimidated by the difficulty involved and do not want to make an error. This lesson helps the bookkeeper understand how to break the complex entry down into a series of standard entries.

Bookkeeping – Amortization (Lesson 53)

Amortization

Amortization is similar to depreciation whereby an asset’s cost is allocated to the expense over time. There are several differences with amortization. Amortization is used with intangible assets and the method is almost always straight line. As a bookkeeper it is your job to maintain the amortization schedules, report the information correctly and interpret the results for management.  

Bookkeeping – Introduction to Depreciation (Lesson 50)

Depreciation

Depreciation is the process of allocating the initial capital outlay for fixed asset purchases over time to the income statement. The basic principle with depreciation is that any fixed asset has a predetermined lifetime based on time, usage or fair market value. Therefore, a fair and equitable allocation of the initial purchase price is applied to each time period. Your job as the bookkeeper is to assign depreciation expense to the respective asset and record the entry as a function of daily operations.

Fixed Assets To Debt Relationship

Fixed Assets to Debt Relationship

Every business owner, especially young entrepreneurs, must understand how long-term debt  is used to finance the purchase of fixed assets. It is a basic principle especially for start-ups. There is a relationship that exists between the two. If created correctly, profitability is enhanced and cash flow is maximized.