Learn how to calculate a growing company's forecasted PP&E expenditure along with depreciation and accumulated depreciation for the future.
- [Instructor] As your business continues to grow, you'll have to make investments in property and equipment. This could include more buildings, warehouses, mannequins, checkout cashier drawers, all the above. These expenses are referred to as capital investments, and they're expected to grow proportionately with sales. So, traditionally, PP&E really doesn't follow a linear trend, there are periods of saving, and then periods of spending, and saving, and spending, and so on, and so forth, especially when it comes to large purchases. PP&E expenditures require a lot of upfront planning.
So, let's look at the balance sheet, and try to calculate some PP&E for the future. I'm in 03_04_BS_Begin. It's basically just a continuation from the previous video. So let's think about what kind of equipment you'll need to purchase. You may want new cash registers, or you may want more racks to hold your stuff, or some extra warehouse space. So let's imagine that you start with the smaller purchases, and plan to move to larger ones as time progresses. So, in 2018, so if I'm looking at PP, I'm on row 16, and projected 2018, your PP is going to increase by 1.3 million.
In 2019, it'll increase by an additional 2.4 million, and in 2020, it'll increase by an additional 4.4 million. So, these are obviously very arbitrary calculations that I'm putting out there, but they're very easy to do in Excel, so on the balance sheet, on row 16, cell D16, I'm simply going to add 1.3 to my historical 2017 value, and it'll give me 4.80 million going toward PP&E. Let's finish all the calculations here.
Again, we're going to add 2.4 million to our projected 2018 to get 7.2 million, and then we're going to increase it by an additional 4.4 million in 2020. We're probably going to get some more warehouse space there, or even a larger purchase. So, that's going to give me 11.6 million in PP&E, so that's a very very easy simplistic calculation. Now let me jump over to my income statement, and that is going to be 03_04_IS_Begin, and I want to settle the depreciation forecast.
So, remember that PP&E includes land, buildings, and equipment, and you can't depreciate the land. Now, let's imagine that the depreciation for the equipment is about half a million for 2018, .75 million for 2019, and one million for 2020. Now imagine that you bought the buildings for two million, and you want to use straight-line depreciation, and you can depreciate commercial property over a 39 year period. So, in cell H16, I can calculate the building depreciation by dividing two million by 39 years.
So I'm going to say equals two million, which is just in decimal form, two, divided by 39 years, and to that, I'm going to add my depreciation from the equipment for 2018, and that equipment was depreciated for half a million, so .5, and I'm going to do this for all of my years. So for 2019, again, I can depreciate the two million by 39 years, and to that, I'm going to add .75 million, that's the depreciation for the equipment.
Same thing for 2020, equals two divided by 39, plus my equipment depreciation at one million. Now, based on these values, we can easily calculate accumulated depreciation for the upcoming years on our balance sheet. So, I'm going to head over to the balance sheet, and I'm going to go to row 17, that's where I'll find my accumulated depreciation. Now, accumulated depreciation has a credit balance, in other words, it's negative. This is because it aggregates the amount of depreciation expense charge against a fixed asset, and over time, the amount of accumulated depreciation will increase as more depreciation is charged against that fixed asset, which results in a lower remaining book value.
So you can go ahead and add, or rather subtract the new depreciation from the previous. So, for example, in cell D17 for 2018, you can add the depreciation expense from 2018 in the income statement to the 2017 accumulated depreciation. So, for example, our 2018 depreciation is .55, as you can see in cell H16. So, what I'll do is I'll say well on the balance sheet, this projected 2018 accumulated depreciation is equal to our historic -1.56 minus .55, which is our additional depreciation.
So, now we're sitting at -2.11 million dollars of accumulated depreciation in 2018. And I'm going to keep doing that, so for 2019, I know that I have an accumulated depreciation of .80, so I'm going to do equals D17 minus .80, and that's going to keep digging me in a hole for accumulated depreciation. And I'll do the same thing for 2020, and that is going to be when I look back at my income statement, that's 1.05, and now I'm sitting at almost four million dollars in the hole for accumulated depreciation.
Great, so it looks like we're almost done with our assets here, both current and other. Now we've got this line on row 18 about good will. In accounting good will is like an intangible asset, and it's associated with a business combination, so think about it, if one company buys another, for example, Amazon just bought Whole Foods, good will is recorded if one company's purchase price is greater than the sum of the fair market value, and the liabilities that are assumed.
And it's really difficult for me to forecast what good will is specially in this particular course, so I'm actually going to go ahead and take out this row, this row 18 here, and delete it. Great, so it looks like we're starting to get a handle on our assets, now I want to turn our attention to some of the liabilities.
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