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Strategies & Market Trends : BFT: Will the tulip craze ever break down? -- Ignore unavailable to you. Want to Upgrade?

To: Witling who wrote (137)	3/23/1998 2:48:00 PM
From: Pancho Villa	Respond to of 650

In general cash flows related to investment activities are related to acquisitions of businesses (very popular lately) and/or investment in plant/equipment. These capital assets are inturn depreciated/amortized. The rationale for placing these assets in the Balance sheet is that they will help in the generation of future revenues (this is actually the definition of what an asset is. That is why I consider it wrong to capitalize and then amortize commissions paid to salesmen. These commissions are salaries which are considered a period cost!). >Also, if a net $16 million went into property and equipment, would you expect to see an increase in property and equipment assets before depreciation? < yes. net of any sales/write offs of any property/equipment with a positive book value on the balance sheet. >Does INVESTING normally include capital items like plant and equipment? Should the bulk of the investing category be amortized purchase expenses, or capital gains in the event of a sale?< In general this is right. An accountant would not understand the term "amortized purchase expenses" though. A cash outlay for plant/equipment is generally considered an investment and goes into the balance sheet. For example, the execess over book value paid for a business can be capitalized (synonimous for placing it as an asset in the BS)as good will and then amortized, or taken as an extraordinary charge that goes into the income statement. Both approaches have advantages and disadvantages. Oddly enough the later is my my preferred approach as it maximizes the present value of cash flows (this is because the charge reduces the tax bill!) However, since the extraordinary charge seems to have been swept under the rug and forgotten forever, If we try to calculate return on assets at a later date one may mistakenly assume that return on assets is greater than it actually is! Even though it does not show up in the BS the investment was made! This is the central idea in EVA analysis. A business should be evaluated on return on assets so a common practice is to add back into the asset base all write-offs and depreciation/ amortization for the last five years (the 5 year time frame is kind of arbitrary) before calculating the ratio. In accounting, the term expense is usually reserved for period expenses showing up in the IS. In general, expenses are cash outlays, net assets used in the generation of period revenues. But now things are getting a bit complicated and we get into a Financial accounting class that I may start some day for the benefit of the little guy at SI. Pancho PS: I do not hold a Ph.D. in accounting but IMHO my working knowledge for investment purposes goes beyond that of many analysts (or perhaps they are lazy and just don't read the SEC fillings). There are more mediocre people outhere that you would expect. This is a direct consequence of the Normal distribution showing up everywhere. yes even at Goldman's an Merril Lynch. In the post above, anyone can nail me in more than one technicality. Getting too strict would result in a much longer and difficult to understand post.