Some things are timeless, like heirlooms, a good
book, an antique, or real estate. Unfortunately,
for most things, time is an enemy. In other
words, they just wear out. Automobiles, boats,
houses, audio and video equipment, cell
phones, and the like all eventually need to be
repaired or replaced. Sometimes, as in the case
of an automobile or a boat, the mere use con-
sumes the benefits. They just wear out as we
use them. Other times, as in the case of elec-
tronic equipment, new functions will cause the
equipment to become obsolete before it wears
out. For example, would you buy a VHS tape
player today? They’re disappearing, not be-
cause they are broken, but because DVDs and
digital cable are fast replacing VHS technology.
Thus, as individuals, we purchase fixed assets
with the intent of using them until either they
become obsolete or wear out.
In the same way, fixed assets are a key ele-
ment of a business’s strategy. Many businesses
need fixed assets in order to operate. For ex-
ample,Marriott International, Inc., the largest
lodging company in the world, needs hotel
rooms in order to operate. Since fixed assets,
such as hotel properties, use significant busi-
ness resources, managers must clearly under-
stand their business goals and strategies before
making significant fixed asset purchases.
A business strives to have the right quan-
tity and the right type of fixed assets. For ex-
ample, the financial success of a lodging (hotel)
company, such as Marriott, depends upon
properly balancing the supply and demand for
rooms. This is because hotel properties become
a long-term commitment once they are built.
Thus, unlike a manufacturing company, a lodg-
ing company cannot easily or quickly reduce
the supply of rooms if demand falls, or quickly
increase the supply of rooms when demand
increases. For this reason, developing hotel
properties with attractive long-term prospects
is critical to Marriott’s or any other lodging
company’s success.
Excess fixed asset capacity caused by either
overinvesting in fixed assets or losing cus-
tomers can lead a company into financial diffi-
culty. For example, many argue that some
Internet companies (e.g., eB2B Commerce,
eToys, and Webvan) failed because they in-
vested significant resources in fixed assets with-
out a clear strategy for earning profits. Trump
Hotels and Casino Resorts, Inc.lost customers
because it failed to competitively maintain its
three Atlantic City hotels and casinos. As a re-
sult, the company had to declare bankruptcy in- In contrast, underinvesting in fixed assets
can limit a business. For example, Apple
Computer Inc.recently suffered shortages of
its popular iPod®during the critical holiday
shopping period as a result of inadequate man-
ufacturing capacity.
In this chapter, we will focus on the ac-
counting for and reporting of fixed assets, such
as a hotel. We describe and illustrate determin-
ing the cost of a fixed asset, depreciation meth-
ods, fixed asset disposals, and how to analyze
the efficiency of fixed asset usage.
Marriott International, Inc.
© MARK LENNIHAN/AP WIDE WORLD PHOTO