JV

Financial Accounting - Balance Sheet & Assets

Balance Sheet Equation

  • \text{Assets} = \text{Liabilities} + \text{Owner's Equity}

Assets

  • Definition: Measurable resource that provides future economic resource

  • Examples: Cash, IOUs (Accounts Receivable), Prepaid Expenses, Buildings, Inventory, ???

  • Assets are resources owned by the business that are expected to bring future economic benefits

Current Assets

  • Current Defined: Liquid (easily converted into cash) and will be used or converted to cash within the next year

  • Examples:

    • Cash

    • Accounts Receivable (IOUs)

    • Inventory

    • Notes Receivable (if paid within one year)

    • Prepaid Expenses

    • Marketable Securities (short-term investment)

  • Notes:

    • The term \"within the next year\" determines current vs non-current classification

Non-Current Assets

  • Non-current Defined: Will be used in the business for longer than one year … usually not liquid

  • Examples:

    • Property, Plant & Equipment (PP&E):

    • Buildings

    • Land

    • Machinery

    • Vehicles

    • Furniture & Fixtures

    • Other Assets:

    • Investments in other companies (not converted to cash within one year)

    • Intangibles (Patents, Copyrights, Goodwill)

Assets: Valuation

  • Historical Cost ( Acquisition Cost )

    • Applies to PP&E, Intangibles

  • Net Realizable Value (NRV)

    • Applies to Accounts Receivable

    • NRV = Estimated Selling Price − Costs to Complete and Sell

  • Mark to Market

    • Applies to Marketable Securities/Investments

  • Lower-of-Cost-or-Market (LCM)

    • Applies to Inventory

    • LCM Rule: \text{LCM} = \min(\text{Cost}, \text{Market})

  • Asset Values

    • Example (In-class)

Depreciation

  • Definition: Depreciation is the systematic and rational allocation of the cost of property and equipment to the period in which it is used to generate revenue

  • Methods:

    • Straight-line Depreciation

    • Acquisition Price − Salvage (Residual) Value

    • Useful Life

  • Other forms of depreciation exist:

    • Accelerated Depreciation

    • Units of Production (e.g., miles)

  • Straight-line Depreciation Formula:
    \text{Depreciation per period} = \frac{\text{Acquisition Price} - \text{Salvage Value}}{\text{Useful Life}}