Assets Flashcards
What are assets?
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
What are current assets?
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.
What is an operating cycle?
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.
What are some common types of current assets?
Cash, short-term investments, accounts receivable, accrued receivables, notes receivable, including loans receivable, merchandise inventory, supplies, prepaid expenses.
What are short-term investments?
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.
What are accounts receivable?
What are accrued receivables?
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.
What are notes receivable?
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.
What is inventory? Why is it a current asset? Are unfinished goods part of inventory in a merchandising company?
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.
What do supplies include?
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.
What are prepaid expenses?
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.
Is there a prescribed order for current assets to be presented on the statement of financial position?
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.
What are cash equivalents?
Cash equivalents are very liquid investments in debt securities that can be easily converted into cash.
What are non-current assets? Name examples.
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.
What are long-term investments? Why are these assets classified as long-term?
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.
Long-term investments are also referred to only as?
As investments. If the word “investment” is used without any modifier (short- or long-term), it is assumed to be long-term.
What are property, plant and equipment?
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.
How are property, plant and equipment items ordered?
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.
Non-current is also interchangeable with?
Long-term.
Property, plant and equipment are sometimes called?
Capital assets or fixed assets.
Most companies record their property, land, and equipment at cost. However, some companies may choose to record these assets at? This is known as?
Fair value instead. This is known as the revaluation model. This is prevalent in the real estate industry but seldom applied by other industries.
Property, plant and equipment, except land, have estimated useful what? What is depreciation and how do companies calculate it?
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).
Only assets with what are depreciated? Why is land never depreciated?
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.
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?
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.
What are intangible assets? Give examples
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.
