FIN 320 Principles of Finance Lecture Notes Pt 2
Assets make up the balance sheet's first section. Assets in finance are any resources that a
company owns. Assets are often divided into current assets and noncurrent (long-term) assets on
the left side of a trial balance. An asset that may be converted into cash or used to settle current
liabilities within a year is referred to as a current asset on the balance sheet. Cash and cash
equivalents, short-term investments, accounts receivable, inventory, and the amount of prepaid
obligations that will be paid within a year are examples of typical current assets. The top of the
balance sheet lists the financial assets that are the most liquid. Cash and cash equivalents come
first. Assets that can be swiftly and readily turned into cash are known as cash equivalents. These
stand out from other investment options due to their brief duration. They have three months to
reach maturity. Most other short-term investments reach maturity in a year. Accounts receivable
(AR) is a term used to describe money due to a company by other organizations as a result of the
sale of products and services on credit. Typically, this is indicated by the creation of an invoice,
which will then have payment conditions on it.
Most manufacturing plants often separate their inventory into the following categories: raw
materials, which are materials and components intended for use in the production of a product.
The term "work in progress" (WIP) refers to materials and components that have started the
process of being transformed into final items. Finished products, or items that are prepared for
sale to clients, and goods for resale, or unsold items that may be sold again. Deferred costs are a
different categorization that refers to an asset made up of cash paid to an entity for products that
will be used in a future accounting period.
An asset that cannot be quickly converted into cash is referred to in accounting as a non-current
asset. This might be contrasted with current assets, which are referred to as liquid assets, such
cash or bank accounts. Property, plant, and equipment (PPE) and investment property are
examples of non-current assets (such as real estate held for investment purposes) Financial
assets. The category of "property, plant, and equipment" often includes things like real estate and
buildings, cars, furniture, office supplies, computers, fixtures and fittings, and machinery.
Compared to short-term assets, these frequently obtain preferential tax treatment (depreciation
allowance).
Ascertainable non-financial assets that cannot be seen, touched, or physically measured are
referred to as intangible assets. They may be distinguished as a different asset since they are the
result of time and effort. Legal intangibles, such trade secrets (like customer lists), copyrights,
patents, and trademarks, and competitive intangibles, like knowledge activities (know-how,
knowledge), collaborative activities, leverage activities, and structural activities, are the two
main categories of intangibles. The "goodwill" intangible asset, which is first recorded at the
moment of purchase, represents the discrepancy between the company's net assets and its market
value. The company's added value over and beyond its net assets often indicates the company's
standing, talent base, and other distinguishing characteristics. Every year, goodwill must be
assessed for impairment and revised if the company's market value has altered.
The equity approach is used to account for investments that represent 20–50% stakes in other
businesses. Such stocks are maintained by the investor as an asset on the balance sheet. The
proportionate distribution of dividends reduces the investment, as does the investor's
proportional part of the associate company's net income (thus a net loss reduces the investment).
The proportionate share of the investee's net income or net loss is shown as an inline column on
the lender's tax return.
Information about the company's liabilities and owner equity may be found in the balance sheet.
A liability is an obligation of an entity resulting from previous transactions or events that, upon
settlement, may cause the transfer or use of assets, the rendering of services, or other future
generation of net gains. Equity is the remaining right or interest that the most junior class of
investors has in assets after all liabilities have been satisfied in accounting and finance. Negative
equity arises when liabilities surpass assets. Shareholders' equity, sometimes known as
stockholders' equity, shareholders' funds, shareholders' capital, or other similar expressions,
refers to the residual ownership stake in a company's assets that is distributed to its common or
preferred stockholders.
Entrepreneurs invest money in their companies at the beginning of their existence to finance
activities. Due to the fact that the firm is a different legal entity from its owners, this places a
capital responsibility on the company. Businesses may be viewed as sums of obligations and
assets for accounting purposes; this is the accounting equation. The positive balance left over
after deducting liabilities is regarded as the owner's stake in the company.
Owner's equity in financial accounting refers to an entity's net assets. The entity's net assets are
the sum of all its assets minus all of its liabilities. The balance sheet, one of the four main
financial statements, includes equity. An entity's assets can be both physical and immaterial, such
as goodwill, reputation, and brand names. Depending on the sort of company, the types of
accounts and descriptions that make up the owner's equity may include common stock, preferred
stock, capital surplus, retained earnings, treasury stock, stock options, and reserve.
