What They Measure
Collectively, the value of all the resources a company uses to conduct business and generate profits. Examples of assets are cash, marketable securities, accounts and notes receivable, inventory of merchandise, real estate, machinery and office equipment, natural resources, and intangibles such as patents, legal claims and agreements, and negotiated rights.
Why They Are Important
No business can continue for very long without knowing what assets it has at its disposal, and using them efficiently. Assets are a reflection of organizational strength, and are invariably evaluated by potential investors, banks, and creditors, and other stakeholders. Moreover, the value of assets is also a key figure that is used to calculate several financial ratios.
How They Work in Practice
Assets are typically broken down into five different categories:
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Current assets. These include cash, cash equivalents, marketable securities, inventory, and prepaid expenses that are expected to be used within one year or a normal operating cycle. All cash items and inventory are reported at historical value. Securities are reported at market value.
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Noncurrent assets, or long-term investments. These are resources that are expected to be held for more than one year. They are reported at the lower of cost and current market value, which means that their values will vary.
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Fixed assets. These include property, plant and facilities, and equipment used to conduct business. These items are reported at their original value, even though current values might well be much higher.
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Intangible assets. These include legal claims, patents, franchise rights, and accounts receivable. These values can be more difficult to determine. Accounts receivable, for example, reflect the amount a business expects to collect, such as $9,000 of the $10,000 owed by customers.
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Deferred charges. These include prepaid costs and other expenditures that will produce future revenue or benefits.
Tricks of the Trade
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Assets do not necessarily include everything of value, such as the talents of individuals, an organization’s collective expertise, or the value of a customer base.
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Classic definitions of assets also often exclude or undervalue trademarks, even though there is universal agreement that these— for example, the three-point star of Mercedes-Benz or Coca-Cola’s red logo—can have enormous value.
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Fixed assets are valued at their original cost, because of the prevailing opinion that they are used for business and are not for sale. Moreover, current market value is essentially a matter of opinion.
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Determining the value of patents can be challenging, because a patent has a finite life span, its value declines each year, and its useful life may be even shorter.
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Some experts contend that the principal assets of “knowledge-based” businesses such as consulting firms or real estate development companies are, in fact, its people. In turn, their aggregate value should be calculated by subtracting the net value of assets from market value.
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