Question

What are the advantages and disadvantages of self-constructed assets? What are two advantages of purchasing asset from an outside organization, as opposed to constructing the assets internally? Justify your response.

Determine the key arguments for and against the accounting treatment of a nonreciprocal transfer. Whether you are for or against the accounting treatment, and explain the method that reflects the best accounting practice.

Answer 1

The financial accounting term self-constructed assets refer to those built by the company and appearing on its balance sheet. The cost of self-constructed assets would include direct costs such as materials and labor associated with its construction. The advantage ofthis assets is that the firm can always rely on them, they can rent for money, and also, they will help the company to use them as collateral in acquiring loans. .The two advantages of purchasing the assets from an outside organization, as opposed to constructing the assets internally includes:

Cost savings: Many businesses embrace outsourcing as a way to realize cost savings or better cost control over the outsourced function. Companies usually outsource to a vendorthat specializes in a given function and performs that function more efficiently than the company could, simply by transaction volume.

Flexibility: Still others outsource to achieve greater financial flexibility, since the sale of assets that formerly supported an outsourced function can improve a company's cash flow. A possible pitfall in this reasoning is that many vendors demand long-term contracts, which may reduce flexibility.

Advantages of purchasing assets from outside the organnisation:

Preserving Your ResourcesOne of the advantages of external funding is it allows you to use internal financial resources for other purposes. If you can find an investment that has a higher interest rate than the bank loan your company just secured, it makes sense to preserve your own resources and put your money into that investment, using the external financing for business operations. You can also set aside your internal financial resources for cash payments to vendors, which can help improve your company's credit rating.

Growth Part of the reason organizations use external funding is it allows them to finance growth projects the company could not fund on its own. For example, if your business is growing to the point that you need additional manufacturing space to keep pace with demand, external financing can help you get the funding you need to build your addition. External funding can also be used for making large capital equipment purchases to facilitate growth that the company cannot afford on its own.