Question

Imagine you are the senior accountant in the fixed assets department of your organization. Management is assessing the benefits of self-constructing fixed assets versus purchasing fixed assets from external sources. Differences of opinion exist among the senior management team on the impact of self-constructing fixed assets versus purchasing fixed assets on the balance sheet, income statement, statement of cash flows, and employee morale. You are asked to provide a presentation to the senior management team highlighting the accounting advantages and disadvantages of constructing versus purchasing assets. Select a position on constructing the asset or purchasing the asset. Defend your position.

Answer 1

Self constructed assets are the one which are manufactured by the company itself.

And purchased assets are the one which are being bought from any third party by the company.

Now let us discuss advantages and disadvantages of both the assets :

Advantages of self constructed assets :

• The assets get the name of the company as its being manufactured by the company. The assets belong to the company.
• Company can earn profits by keeping them on rent, using them as a resource for their own company whenever there is need
• Compamy can use them as a choice for collateral, when they wish to take loans from bank.

Disadvantages of self constructed assets :

• It costs huge amount to build the assets
• These assets depreciates with time causing loss to company.

Advantages of purchased assets :

• Less cost on the assets being bought.
• They require less effort to be maintained.
• There is flexibility in them as it helps add cash in the company by being employed or being sold.

Disadvantages of purchased assets are :

• They also depreciates with time.
• There is a risk to flexibility as the seller of the asset can demand for certain year bond for the usage of the assets that is may be they would like to consider a long term business with the company related to the assets. This would steal the flexibility.

Thus, we saw all the advantages and disadvantages of both the assets.

I would like to settle for a position with construction of assets.

Now, besides few disadvantage, one of the biggest advantage of such assets is, whenever company would in need for requiring any type of cash help, these assets without any condition can act as a back up for the company.

These assets not only this but can also be used as equipment fir any project that would help add cash flows to the company.

And talking about the depreciation, then both constructed and purchased are prone to depreciation with time.

Hence, its good to construct some assets.

Whereas there are few assets which can be worth if purchased from outside. Such assets should be purchased from outside if they provide other benefits for which they can be considered worth. Rest its better to construct the assets by the company itself.