Assets

Question 1

What are assets?

Answer 1

Assets are the resources that a company owns or controls that will provide future economic benefits. Assets include those resources whose benefits will be realized within one year (current assets) and those resources whose benefits will be realized over more than one year (non-current assets).

Assets:

• The resource must have future economic benefits.
• the entity must have control in the present over the future economic benefits, and
• the event giving risk to the control over the economic benefits must have occurred in the past

Question 2

What are current assets?

Answer 2

They are assets that are expected to be converted into cash or will be sold or used up within one year of the company’s financial statement date or its operating cycle, whichever is longer.

Question 3

What is an operating cycle?

Answer 3

The operating cycle of a company is the average time it takes to go from cash to cash in producing revenue. In the merchandising business, this means the time it takes to purchase inventory, pay cash to suppliers, sell the inventory on account, and then collect cash from customers. For most businesses, the operating cycle is a year. But for some businesses, such as vineyards or airplane manufacturers, the operating cycle is longer than a year.

Question 4

What are some common types of current assets?

Answer 4

Cash, short-term investments, accounts receivable, accrued receivables, notes receivable, including loans receivable, merchandise inventory, supplies, prepaid expenses.

Question 5

What are short-term investments?

Answer 5

They are investments in debt securities (e.g., bonds of another company) or equity securities (e.g., shares of another company) that are held in hopes of generating interest income and/or gains from profitable resale in the near term. These are commonly known as trading investments.

Question 6

What are accounts receivable?

What are accrued receivables?

Answer 6

Accounts receivable are amounts owed to the company by customers who purchased products or services on credit (on account).

Accrued receivables are amounts owed to the company for interest, sales tax, rent, and like items.

These and other types of receivables represent revenues earned by the company that have not yet been received in cash.

Question 7

What are notes receivable?

Answer 7

Are amounts owed to the company by customers or others that are supported by a written promise to repay. Loans receivable are a type of note receivable.

Question 8

What is inventory? Why is it a current asset? Are unfinished goods part of inventory in a merchandising company?

Answer 8

Inventory refers to goods held for sale to customers. This can include both “finished” and unfinished” goods. Unfinished goods remains part of inventory until it is processed to become a finished good.

It is a current asset because it will be sold and converted to cash or accounts receivable during the year.

For merchandising companies like Canadian Tire, inventory consists only of finished goods such as automotive, sporting, and household goods, all ready for sale to customers, and its inventory is normally referred to as merchandise inventory.

Question 9

What do supplies include?

Answer 9

It includes consumable items like office supplies (e.g., paper, toner, pens) and cleaning supplies. They are a current asset because we expect that these will be used up by the business within the year.

Question 10

What are prepaid expenses?

Answer 10

They represent the cost of things like rent and insurance paid in advance of use. They are current assets because they reflect unused benefits available for use during the year.

Question 11

Is there a prescribed order for current assets to be presented on the statement of financial position?

Answer 11

While total current assets must be disclosed, there is no prescribed order for current assets to be presented on the statement of financial position. North American companies normally list current assets in the order in which they are expected to be converted into cash; that is, in their order of liquidity. Some international companies list current assets in the reverse order of liquidity.

Question 12

What are cash equivalents?

Answer 12

Cash equivalents are very liquid investments in debt securities that can be easily converted into cash.

Question 13

What are non-current assets? Name examples.

Answer 13

Non-current assets are not expected to be converted into cash, sold, or used up by the business within one year of the financial statement date or its operating cycle. In other words, non-current assets are everything that is not classified as a current asset.

Examples include: Investments, property plant and equipment, intangible assets and goodwill, other assets.

Question 14

What are long-term investments? Why are these assets classified as long-term?

Answer 14

These include (1) multi-year investments in debt securities (e.g., loans, notes, bonds, or mortgages) that management intends to hold to earn interest, and (2) equity securities (e.g., shares) of other companies that management plans to hold for many years to generate investment revenue or for strategic reasons. These assets are classified as long-term because they are not readily marketable or expected to be converted into cash within one year.

Question 15

Long-term investments are also referred to only as?

Answer 15

As investments. If the word “investment” is used without any modifier (short- or long-term), it is assumed to be long-term.

Question 16

What are property, plant and equipment?

Answer 16

These are tangible assets with relatively long useful lives that are currently being used in operating the business. This category includes land, buildings, equipment, and furniture.

Question 17

How are property, plant and equipment items ordered?

Answer 17

Although the order of property, plant, and equipment items can vary among companies, these items are normally listed in the statement of financial position in their order of permanency. That is, land is usually listed first as it has an indefinite life, and is followed by the asset with the next longest useful life, normally buildings, and so on.

Question 18

Non-current is also interchangeable with?

Answer 18

Long-term.

Question 19

Property, plant and equipment are sometimes called?

Answer 19

Capital assets or fixed assets.

Question 20

Most companies record their property, land, and equipment at cost. However, some companies may choose to record these assets at? This is known as?

Answer 20

Fair value instead. This is known as the revaluation model. This is prevalent in the real estate industry but seldom applied by other industries.

Question 21

Property, plant and equipment, except land, have estimated useful what? What is depreciation and how do companies calculate it?

Answer 21

Useful lives. Because these assets benefit future periods, their cost is allocated over their estimated useful lives through a process called depreciation. Companies calculate depreciation by systematically assigning a portion of the asset’s cost to expense each year (rather than expensing the full cost in the year the asset was purchased).

Question 22

Only assets with what are depreciated? Why is land never depreciated?

Answer 22

Assets with estimated useful lives. Land also generates revenue, but its estimated useful life is considered to be infinite as land does not usually wear out or lose its value.

Question 23

Assets that are depreciated should be reported in which statement and at? What is accumulated depreciation and what type of account is it? What is the carrying amount and what is it commonly known as?

Answer 23

Statement of final position at cost less their accumulated depreciation.

Accumulated depreciation shows the amount of depreciation taken so far over the life of the asset. It is a contra asset account; that is, its balance is subtracted from the balance of the asset that it relates to.

Carrying amount is the difference between cost and accumulated depreciation, also commonly known as net book value or just simply book value.

Question 24

What are intangible assets? Give examples

Answer 24

Assets that cannot be seen not touched but are valuable. Are non-current assets that do not have physical substance and that represent a privilege or a right granted to, or held by, a company. Examples of intangible assets include patents, copyrights, franchises, trademarks, trade names, and licences that give the company an exclusive right of use for a specified period of time.

Question 25

What are the two groups of intangible assets?

Answer 25

Definite lives and those with indefinite lives. Similar to buildings and equipment, the cost of intangible assets with definite useful lives is allocated over these future periods. Similar to land, the cost of intangible assets with indefinite lives is not allocated over future periods.

Question 26

In IFRS, depreciation and amortization are referred to?

Answer 26

IFRS for publicly traded companies recommends the use of the term depreciation to refer to the allocation of cost over the useful lives of depreciable property, plant, and equipment and the term amortization to refer to the allocation of the cost of certain kinds of intangible assets.

Question 27

Does Accounting Standards for Private Enterprises use depreciation or amortization?

Answer 27

Accounting Standards for Private Enterprises recommend the use of the term amortization to allocate the cost of both property, plant, and equipment and intangible assets. To complicate matters further, some publicly traded companies use the terms depreciation and amortization interchangeably.

Question 28

What is goodwill? How is goodwill similar and different from intangible assets?

Answer 28

Goodwill results from the acquisition of another company when the price paid for the company is higher than the fair value of the purchased company’s net identifiable assets. Goodwill is a calculated amount- simply the difference between the price paid for and the fair value of the assets acquired of the purchased company.

Goodwill is similar to intangible assets in that it has no physical substance but will generate future value. It differs from intangible assets in that it cannot be separated from the company and sold- it is determined in relation to the acquired company as a whole. The only way it can be sold is to sell the acquired company. Goodwill is not amortized and is reported separately from other intangibles.

Question 29

Some companies also report other types of assets that don’t fit neatly into any of the above classifications (including non-current receivables, deferred income tax assets, and property held for sale). Other assets are usually separately reported so that users can get a better idea of their nature and are accompanied by an explanatory note to the financial statements.

What is deferred income tax assets? What is it aka?

Answer 29

Represents the income tax that is expected to be recovered in a later year or years due to deductions that a company is able to take when preparing its future corporate income return.

AKA future income tax.