Essential Financial Accounting Knowledge for Investors – Assets

Let's talk about assets, a fundamental concept in financial accounting that you absolutely need to understand when investing. Financial accounting can seem complex, but we'll break it down together in a simple way!

Assets

Definition and Importance

In financial accounting, which plays a crucial role in understanding a company's financial status and operating performance, one of the most basic concepts is assets. Assets represent resources owned by a company, both tangible and intangible, that have economic value and are expected to generate future economic benefits.

Characteristics of Assets

Economic Value: Assets must have measurable economic value in monetary terms. In other words, the value of an asset is measured by its market price or fair value.

Future Economic Benefits: Assets must provide economic benefits to the company in the future. Economic benefits can manifest in various forms, such as increased revenue, reduced costs, and asset utilization.

Ownership: The company must hold ownership of the asset. Assets leased from others or assets for which usage rights are granted through a lease agreement are not classified as assets.

Assets with these characteristics are recorded on the debit sideof the company's balance sheet, and their types are diverse, as follows:

• Cash and Cash Equivalents: Assets that can be readily converted into cash, such as currency, demand deposits, and short-term financial instruments with maturities of 3 months or less.
• Accounts Receivable: Receivables arising when goods or services are provided, but payment has not yet been received.
• Inventory: Goods, products, and raw materials held for sale.
• Property, Plant, and Equipment (PP&E): Physical assets such as land, buildings, machinery, and vehicles.
• Intangible Assets: Assets without physical form, such as patents, trademarks, and goodwill.

Since assets contribute to a company's future revenue generation, investors can assess the company's financial stability and growth potential by examining the size and composition of its assets.

Classification of Assets: Current Assets and Non-Current Assets

Assets are classified into current assets and non-current assets based on a 1-year timeframe.

Current Assets

These are assets expected to be converted into cash or consumed within one year. They are primarily comprised of liquid assets and inventory.

• Liquid Assets: Cash and cash equivalents, short-term financial instruments, accounts receivable, accrued income, prepaid expenses, etc.
• Inventory: Goods, finished goods, work-in-progress, raw materials, etc.

Understanding Current Assets and Key Elements for Investors

Current assets play a vital role in a company's short-term operations and funding. Investors can analyze current assets to understand a company's financial health and future prospects. Below are the key elements investors need to know to understand and analyze current assets.

• Cash and Cash Equivalents: The most basic current asset, which can be readily converted into cash. This is a key indicator for evaluating a company's ability to pay and liquidity. Cash equivalents include short-term financial instruments held for the purpose of earning interest income, so they should be considered together.
• Accounts Receivable: Represents credit sales that have not yet been collected from customers. By examining whether accounts receivable are being collected quickly and whether the allowance for doubtful accounts is appropriate, you can assess the company's credit risk and the likelihood of collecting payments.
• Inventory: Assets held for sale or in the production process. By analyzing the size and turnover of inventory, you can judge the efficiency of a company's production and sales activities. Also, the obsolescence and impairment of inventory are important checkpoints.
• Other Current Assets: Besides the major items mentioned above, there are various forms of current assets, such as accrued income, prepaid expenses, and loans receivable. These items are related to a company's specific circumstances and should be reviewed individually and understood in connection with the business characteristics of the company.

Non-Current Assets

These assets are used or held for investment purposes over a period exceeding one year and are categorized into investment assets, property, plant, and equipment, intangible assets, and other non-current assets.

• Investment Assets: Long-term financial instruments, available-for-sale securities, held-to-maturity securities, equity method investments, etc.
• Property, Plant, and Equipment (PP&E): Land, buildings, structures, machinery, vehicles, etc.
• Intangible Assets: Goodwill, industrial property rights, development expenses, etc.
• Other Non-Current Assets: Deferred tax assets, lease deposits, long-term receivables, etc.

These classified assets serve as crucial indicators for evaluating a company's liquidity and financial stability. Higher current assets indicate a stronger short-term funding capacity, while proper management of non-current assets can contribute to long-term growth and profitability.

Types of Non-Current Assets and Their Impact on Investment

Non-current assets are assets held by a company for an extended period and play an essential role in investor assessments of a company's financial condition and operating performance. Non-current assets include the following types:

• Property, Plant, and Equipment (PP&E): Physical assets held by a company for use in its operations, with land, buildings, and machinery being typical examples. The size and carrying amount of PP&E are significant indicators for evaluating a company's production capacity and revenue-generating ability. However, the costs associated with acquisition and maintenance of PP&E, as well as depreciation expenses, must be considered.
• Intangible Assets: Non-physical assets that can be identified, such as industrial property rights like patents and trademarks, copyrights, and expenses like development costs and software purchase costs. Intangible assets are a critical factor in determining a company's future competitiveness and market dominance, but amortization expenses and impairment losses should be considered.
• Investment Assets: Assets invested in other companies or financial instruments, including stocks, bonds, and real estate. Changes in the value of investment assets have a direct impact on a company's financial performance, so investors should carefully examine the composition and management strategies of investment asset portfolios.
• Other Non-Current Assets: Deferred tax assets, lease deposits, long-term prepaid expenses, etc., fall under this category. Each item is related to a company's specific situation and should be carefully considered when analyzing financial statements.

These non-current assets reflect a company's past performance and current status, and can influence future earnings and cash flows. Therefore, investors should understand the classification and evaluation methods of non-current assets and consider them in conjunction with the company's financial condition and business strategy.

Asset Valuation Methods and Their Role in Financial Statements

In financial statements, assets are a crucial component representing a company's financial position and operating performance. Asset valuation is the process of measuring and assessing the value of these assets, and it involves the following methods:

1.Historical Cost: This method values assets based on their original acquisition price. While it provides objective information, it may not reflect the actual value when asset values fluctuate over time.

2.Current Cost: This method values assets based on the cost of acquiring them at the current point in time. It can reflect a more realistic value than historical cost but relies on estimates, which can introduce errors.

3.Fair Value: This method values assets based on their market price or the amount that could be received in exchange for the service provided. Fair value can most accurately reflect an asset's current value, but if there is no market price, it must rely on estimates.

The assets valued using these methods play the following roles in financial statements:

• Balance Sheet: Shows the size and composition of assets, providing essential information for evaluating a company's financial position.
• Distinguishes between current assets and non-current assets, and the characteristics and valuation methods of each should be considered.
• Income Statement: Shows the revenue and expenses resulting from the disposal or use of assets, providing valuable information for evaluating a company's operating performance.
• Examples include gains or losses on asset disposal and depreciation expense.

Therefore, investors should understand asset valuation methods and their role in financial statements and actively use them when evaluating a company's financial position and operating performance.