asset

What It Is

An asset is an economic resource that a) can be owned, and b) is expected to provide future economic benefits.

How It Works

A company lists its assets on its balance sheet. Common asset categories include cash and cash equivalents; accounts receivable; inventory; prepaid expenses; and property and equipment. Although physical assets commonly come to mind when one thinks of assets, not all assets are tangible. Trademarks and patents are examples of intangible assets.

[InvestingAnswers Feature: Ten Things You Need to Know About Every Balance Sheet]

Assets are presented on the balance sheet in order of their liquidity. Current assets, which are expected to be consumed or converted to cash within one year, are listed at the top. Cash, short-term investments and inventory are examples of current assets.

Long-term assets, or fixed assets, are expected to be consumed or converted to cash after one year's time, and they are listed on the balance sheet beneath current assets. Property (such as office space or buildings) and equipment are common long-term assets.

Investors buy assets with the understanding that assets should hold, or even better, grow their economic value over time. Common asset classes for individual investors include stocks, bonds, cash, foreign currencies, collectibles, precious metals, real estate and commodities. A collection of assets is called a "portfolio," and it is widely believed that an individual's portfolio should include assets from several different categories, a process called "asset allocation."

Why It Matters

Assets create or preserve wealth, making them of utmost importance to both individuals and companies.

Financial analysts are encouraged to carefully study a company’s financial statements, including the balance sheet. By using the practice of ratio analysis, an analyst can determine how good a company is at using its assets to generate wealth for shareholders. Read on to learn how to use the following ratios:

Return on Assets (ROA) & Return on Net Assets (RONA) -- measures of how much profit is generated by a company's assets.

Current Ratio, Quick Ratio, & Acid-Test Ratio -- measures of a company's ability to meet short term obligations.

[InvestingAnswers Feature: Financial Statement Analysis for Beginners -- The Balance Sheet]

Source: Investing Answers

What It Is

For firms, a capital asset is an asset that has a useful life longer than one year and is not intended for sale during the normal course of business.

For individuals, capital asset typically refers to anything the individual owns for personal or investment purposes. This excludes property held for sale in the normal course of business, money received or about to be received from the sale of that property, depreciable personal property used for business (such as rental property), protected creative works (such as copyrights on a book), and government publications purchased or received for free from the government.

How It Works

Capital assets usually include buildings, land, and major equipment. For example, Company XYZ might own a factory building on three acres of land, and the factory might be full of expensive equipment. The building, the land, and the equipment are all usually considered capital assets. Construction in progress, trademarks, patents, copyrights, vehicles, intellectual property, and art can also count.

Capital assets are recorded on the balance sheet at their historical cost, less any accumulated depreciation (or amortization in the case of intangible assets). So if Company XYZ paid $100,000 for a piece of equipment in the factory, it would record it as a $100,000 asset on its balance sheet.

But as the asset ages and becomes worth less, Company XYZ would increase the amount of accumulated depreciation associated with the equipment, so that the equipment's net book value reflects its reduced value.

Why It Matters

Companies have some leeway in deciding what to count as a capital asset. A $10 stapler, for example, has a useful life of more than one year, but because it is of such little monetary value, it is often administratively easier to expense the stapler (that is, to reflect its cost as an expense on the income statement) than to have the accounting staff set up a depreciation schedule for the stapler. Thus, many companies create written capital asset policies that dictate what assets must be capitalized and include a minimum threshold of purchase price.

It is also important to note that the Financial Accounting Standards Board (FASB) and the IRS both have some influence over the limits of the useful lives of capital assets. They do this to prevent companies from assigning their capital assets extremely long useful lives in order to record tiny depreciation expenses (and thus inflate profits).

Source: Investing Answers

What It Is

A fixed asset is anything that has commercial or exchange value, generates revenue, has a life longer than one year and has a physical form.

How It Works

Let’s assume XYZ Company intends to purchase an office building for $10 million. The building has a physical form, will last longer than a year and generates revenue, making it a fixed asset. When the company executes a legal purchase agreement with the seller, XYZ Company will have a place from which to conduct its business operations, and it will control what happens to the building from that point forward. Thus, XYZ Company acquired a $10 million asset and should reflect this fixed asset on its balance sheet.

According to the Financial Accounting Standards Board, all assets must provide reasonably estimable future economic benefits, must be controlled by the owner and must be the result of a prior event or transaction (such as a purchase).

Companies often record fixed assets on their balance sheets as property, plant and equipment. Like most assets, fixed assets usually lose value as they age, that is, they depreciate (amortization is the term used when referring to intangible assets). The rate at which a company chooses to depreciate its assets may result in a book value that differs from the current market value of the assets.

Why It Matters

Although fixed assets commonly come to mind when one thinks of assets, not all assets are fixed. Trademarks, patents and goodwill are examples of intangible assets.

Regardless of their physical form, however, information about a company’s assets is a key component of accurate financial reporting, business valuation and thorough financial analysis. Although the Financial Accounting Standards Board, the Securities and Exchange Commission and other regulatory bodies define how and when a company’s assets are reported, companies may employ a variety of accepted methods for recording, depreciating and disposing of assets, which is why analysts must also carefully study the notes to a company’s financial statements.

For more detail about how the Financial Accounting Standards Board defines and governs accounting for assets, {ia_ext|go here|http://www.fasb.org/pdf/con6.pdf}.

Source: Investing Answers

What It Is

An intangible asset is an asset that lacks a physical substance.

How It Works

For example, goodwill, patents, trademarks and copyrights are intangible assets. None of these assets can be physically touched, but they can still have value.

The line item for intangible assets is found on the balance sheet. Though goodwill is considered an intangible asset, it's often listed as a separate line item.

[InvestingAnswers Feature: Financial Statements for Beginners -- The Balance Sheet]

Why It Matters

Intangible assets can be a significant percentage of a company's total assets, and therefore have a big impact on a firm's book value. In most cases, an analyst calculating book value will only include those intangible assets that can be separated from the company and sold. Goodwill cannot be separated from the company, so it is generally not included in book value calculations. But a valuable patent can be sold, and would be included in book value.

To learn more, click here to see A Simple Method for Calculating Book Value.

Source: Investing Answers

What It Is

In finance, net assets refers to the value of a company's assets minus its liabilities. For individuals, the concept is the same as net worth.

How It Works

The formula for net assets is:

Net assets = Total assets - Total liabilities

Let's assume that Company XYZ's balance sheet reported $10,500,000 in assets and $5,000,000 in total liabilities. The company's net assets would be:

Net Assets = $10,500,000 - $5,000,000 = $5,500,000

It is important to note that most assets and liabilities on the balance sheet are listed at their book value rather than at their fair market value, and thus net assets doesn't necessarily represent the cash a company would have leftover if it sold all of its assets and paid all of its liabilities.

Why It Matters

Net assets are virtually the same as shareholders' equity--both reflect the difference between what the company owns and what it owes. Typically, the higher a company's net asset value, the higher the value of the company.

Companies with negative net assets (or individuals with negative net worth) are usually in a lot of trouble. Frequently, one solution is to sell off assets in order to generate cash and pay down debt. Companies may also try to renegotiate their existing debt to lower the payments or principal due. Firms can also file for Chapter 11 bankruptcy, which allows them to restructure their debts. If none of these tactics are successful, a firm with negative net assets will eventually end up in Chapter 7 bankruptcy and will be liquidated.

To calculate a company's ability to generate profits from its net assets, an analyst can use the Return on Net Assets (RONA) profitability ratio.

Source: Investing Answers

What It Is

A tangible asset is anything that has commercial or exchange value and has a physical form.

How It Works

Let’s assume XYZ Company intends to purchase an office building for $10 million. The building has a physical form; it is a tangible asset. When the company executes a legal purchase agreement with the seller, XYZ Company will have a place from which to conduct its business operations, and it will control what happens to the building from that point forward. Thus, XYZ Company acquired a $10 million asset and should reflect this tangible asset on its balance sheet.

According to the Financial Accounting Standards Board, a tangible asset, like all assets, must provide reasonably estimable future economic benefits, must be controlled by the owner, and must be the result of a prior event or transaction (such as a purchase).

Companies often record tangible assets on their balance sheets as property, plant, and equipment. Like most assets, tangible assets usually lose value as they age, that is, they depreciate (amortization is the term used when referring to intangible assets). The rate at which a company chooses to depreciate its assets may result in a book value that differs from the current market value of the assets.

Why It Matters

Although physical assets commonly come to mind when one thinks of assets, not all assets are tangible. Trademarks, patents, and goodwill are examples of intangible assets.

Regardless of their physical form, however, information about a company’s assets is a key component of accurate financial reporting, business valuation and thorough financial analysis. Although the Financial Accounting Standards Board, the Securities and Exchange Commission, and other regulatory bodies define how and when a company’s assets are reported, companies may employ a variety of accepted methods for recording, depreciating and disposing of assets, which is why analysts must also carefully study the notes to a company’s financial statements.

For more detail about how the Financial Accounting Standards Board defines and governs accounting for assets, {ia_ext|go here|http://www.fasb.org/pdf/con6.pdf}.

Source: Investing Answers

What It Is

A wasting asset is a property or security that has a limited life and loses value over its life.

How It Works

Assets have a useful life, usually based on the period of time that they have productive capacity. As the asset is used, it depreciates, eventually having little or no residual value.  During the period of depreciation, the asset is called a "wasting asset." For example, natural resources, such as gas and timber, are wasting assets that eventually are used and then have no remaining value.

In the capital markets, this can also be true. Some securities have a deadline for their purchase or sale. In some cases, the security loses value as it gets closer to the deadline. This is known as time decay.

For example, an option with a fixed end date for its execution may be worth less and less as the end date approaches. This is particularly relevant with regard to derivatives that are built on the movement of a particular underlying security. As the end date approaches and it becomes clearer to which direction the security will move, the risk is lower. Therefore, the market value of the derivative falls accordingly.

Why It Matters

All assets depreciate eventually.  Investors should be aware of the extent to which wasting assets may disappear, leaving the investment with little or no asset base.  For a business, it should invest in processes to ensure that its assets are renewable, recyclable, and sustainable.   At the same time, wasting assets may be well worth the initial investment, yielding substantial profit for the company.

Source: Investing Answers