Red Hen Company, producing and selling fresh eggs, has an operating cycle of two years which is different from what usually companies have. The lengthier operating cycle for Red Hen makes classification of assets different for the company.
The definition for Current assets according to IFRS, is ‘assets expected to be realized or intended for sale or consumption in the entity’s normal operating cycle.’ (Davies T., 2002)
Definition of property plant & Equipment
On the other hand, Property, Plant & Equipment can be defined as ‘assets which are purchased for continued and long-term use in earning profit in a business’ (Kimmel, 2007)
It is not compulsory for a revenue producing asset to be classified as PPE. PPE can be classified as a current asset if it has to be sold within the operating cycle. (CFA Program Curriculum, 2009).
The laying hens are sold within two years which is the length of the operating cycle of the company. Since the hens are sold before the end of the operating cycle, they should be classified as current asset according to the definition mentioned above.
Also, it should be noted that it is the part of the company’s business to sell the hens after two years to soup companies to earn revenue from it. Therefore, the egg laying hens fully meet the definition of the current assets since they are expected to be realized within the normal operating cycle.
The Term Paper on Company Comparison: Raytheon (Rtn) and Textron (Txt)
Raytheon was founded in Cambridge, Massachusetts in 1922, as the American Appliance Company, by Laurence K. Marshall, Vannevar Bush, and Charles G. Smith. Marshall and Bush were engineering students, while Smith was an inventor and scientist, but they were all entrepreneurs. After failures to market an idea for a new refrigerator the trio began to focus on electronics. (Raytheon, Wikipedia.com) An ...
Even though the hens are earning profits for the company and involved in production of the product, which is the definition of the Property, Plant and Equipment, the hens are not purchased for continued and long term use, hence cannot be classified as property plant or equipment.
Therefore we can conclude that the controller outside the company is correct in saying that the egg producing flock should be classified as current assets in the balance sheet presentation of the company at the end of the first year.
References
CFA Program Curriculum. (2009).
Financial Reporting and Analysis. CFA Institute.
Davies T., P. B. (2002).
Business Accounting and Finance. Mcgraw Hill & Companies.
Kimmel, P. D. (2007).
Financial Accounting: Tools for Business Decision Making, 4e. John Wiley & Sons.
