What to Do
“Assets” is a term that covers anything of material worth owned by a company. They are often categorized as follows:
- Current assets such as cash and cash equivalents; trading securities; receivables; inventory; and prepaid expenses (like insurance, that is recorded as an asset before it is used). Cash and inventory are reported on the balance sheet at historical cost; securities at market value.
- Long-term investments (or non-current assets) are resources to be held for at least one year. They are reported at either cost or current market value, whichever is the lower—so their values fluctuate.
- Fixed assets are tangibles like property, plant and equipment (PPE), used on a continuing and long-term basis to generate profits. Fixed assets are reported on the balance sheet at their original value (although present value could be considerably higher).
- Intangible assets like legal claims, franchises, negotiated rights, trade names, and accounts receivable. It can be much more challenging to assign value to these assets. For example, accounts receivable is the amount a business expects to collect of the money owing to it—including payment for goods and services supplied on credit.
- Deferred charges are expenditure that is recorded on the balance sheet as an asset until it is used—like prepaid rent, or the underwriting fees on a bond issue.
What You Need to Know
- There are some things of value that are not defined as “assets,” like a company’s customer base, the combined knowledge of staff, or the abilities of individual employees.
- In areas like biotechnology or software development (knowledge-based businesses), the value of the company is effectively its people, networks and expertise.
- Some definitions leave out trademarks or give them insufficient weight—although about some (such as Coca-Cola or Kodak) there is no disagreement.
- Fixed assets are regarded as not for sale (because they’re used in conducting an organization’s business), so they are valued at their original cost.
- Current market value is a subjective calculation—particularly in relation to certain intangibles like patents, whose value declines over time and which have a finite useful life.
Where to Learn More
Web Site:
Investorwords.com: www.investorwords.com
