Property, Plant, and Equipment

Definition

Property, plant, and equipment (PP&E) refers to the tangible, long-term assets that a company owns and uses in its operations to generate revenue. These assets have a physical substance and are not intended for sale, but rather to be used in the business over an extended period of time.

5 Must Know Facts For Your Next Test

1. PP&E is classified as a noncurrent asset on the balance sheet, as it is not expected to be converted into cash within one year.
2. The cost of PP&E includes the purchase price, installation costs, and any other expenditures necessary to prepare the asset for its intended use.
3. Companies must estimate the useful life of each PP&E asset and allocate its cost through systematic depreciation over that time period.
4. PP&E transactions can impact the expanded accounting equation by affecting the asset, liability, and equity components.
5. Changes in PP&E balances are reported in the investing activities section of the statement of cash flows.

Review Questions

• Explain how PP&E is classified and reported on the balance sheet, and how this relates to the definition of current and noncurrent assets.
  • PP&E is classified as a noncurrent asset on the balance sheet because it is not expected to be converted into cash within one year. This aligns with the definition of current and noncurrent assets, where current assets are cash or other assets that can be converted to cash within one year, while noncurrent assets are long-term investments or resources that are not expected to be converted to cash in the near term. The classification of PP&E as a noncurrent asset reflects its long-term nature and the company's intention to use these assets in operations over an extended period.
• Describe how changes in PP&E balances are reported on the statement of cash flows and how this relates to the differentiation between operating, investing, and financing activities.
  • Changes in PP&E balances are reported in the investing activities section of the statement of cash flows. This is because the acquisition, disposal, or improvement of PP&E assets are considered investing activities, as they involve the use of cash to purchase, sell, or maintain long-term assets. The investing activities section of the statement of cash flows provides information about a company's cash outflows for capital expenditures and cash inflows from the sale of PP&E, which are distinct from the cash flows related to operating activities (e.g., revenue and expenses) and financing activities (e.g., debt and equity transactions).
• Analyze how PP&E transactions impact the expanded accounting equation and explain the relationship between these transactions and the preparation of the completed statement of cash flows using the indirect method.
  • PP&E transactions can impact the expanded accounting equation by affecting the asset, liability, and equity components. For example, the purchase of a new piece of equipment would increase the PP&E asset account, while the payment for that equipment would decrease the cash account (an asset) and potentially increase a liability account if the purchase was financed. These changes in the accounting equation are then reflected in the preparation of the completed statement of cash flows using the indirect method. The indirect method starts with net income and then makes adjustments for non-cash items, such as depreciation of PP&E, as well as changes in asset and liability accounts, including PP&E, to arrive at the net cash provided by or used in operating, investing, and financing activities.

Related terms

Depreciation: The systematic allocation of the cost of a long-term asset over its useful life, reflecting the asset's decline in value over time.

Capital Expenditures: Funds used by a company to acquire, upgrade, or maintain physical assets such as property, plant, and equipment.

Impairment: A reduction in the carrying value of an asset when its fair value is lower than its book value, indicating a permanent loss in value.