Assets represent the company’s resources, which must have value, be measurable and of quantifiable cost, and be company owned (Exhibit 6.11). Assets are recorded at their historical (acquisition) cost on the balance sheet, in-line with the conservatism principle.
Exhibit 6.11. Company Assets Typically Consist of (But are Not Always Limited to):
Cash and Cash Equivalents
Money held by the company in its bank accounts
Marketable Securities (Short-Term Investments)
Debt or equity securities held by the company
Accounts Receivable
Payment owed to a business by its customers for products and services already delivered to them
Inventories
Represent any unfinished or finished goods that are waiting to be sold, and the direct costs associated with the production of these goods
Property, Plant and Equipment (Fixed Assets)
Land, buildings, and machinery used in the manufacture of the company’s services and products
Goodwill and Intangible Assets
Non physical assets such as brands, patents, trademarks, and goodwill acquired by the company that have value based on the rights belonging to that company
Deferred Taxes
Potential future tax savings arising when taxes payable to the IRS are higher than those recorded on financial statements
Other (Miscellaneous) Assets
Items that do not fit into other categories, such as pre paid expenses, or some types of short-or long-term investments
Current assets are expected to be convertible into cash within 12 months and include accounts receivable, inventory, and prepaid expenses.
Noncurrent assets are not expected to be converted into cash during the company’s normal course of operations and include PP&E, goodwill and intangible assets, and other noncurrent assets.
Assets are organized in the descending order of liquidity, with current assets recorded ahead of noncurrent assets.
9. Investments
Exercise
Q1:
What benchmark level of ownership are equity method investments typically associated with?
20–50%
Less than 20%
50–75%
Over 75%
10. Intangible Assets
Exercise
Q1:
Which of the following is/are true about intangible assets?
Intangible assets comprise nonphysical internally developed and acquired assets.
Intangible assets are classified as current assets.
Most intangible assets are amortized over their useful life on the income statement.
Intangible assets are classified as noncurrent assets.
11. Goodwill
Exercise
Q1:
Which of the following is/are false about goodwill?
Goodwill impairment equals the difference between the book value and its fair market value.
Goodwill represents the amount by which the purchase price for a company exceeds its fair market value.
Goodwill was amortized on the income statement prior to December 2001.
After December 2001, companies have a choice of either amortizing goodwill on their income statements or performing annual goodwill impairment tests.
Which of the following is/are false about goodwill?
Goodwill impairment equals the difference between the book value and its fair market value.
Goodwill represents the amount by which the purchase price for a company exceeds its fair market value.
Goodwill was amortized on the income statement prior to December 2001.
After December 2001, companies have a choice of either amortizing goodwill on their income statements or performing annual goodwill impairment tests. [After December 2001, companies that have goodwill recorded on their balance sheets are required to perform annual goodwill impairment tests; amortization of goodwill has been eliminated.]
