Let's talk about assets, a fundamental concept in financial accounting that you need to know when investing. Financial accounting may seem complicated, but we'll break it down together!

Assets

Definition and Importance

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

Characteristics of Assets

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

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

Ownership: Assets must be owned by the company. Assets leased from others or those for which usage rights are granted through lease agreements are not classified as assets.

Assets with these characteristics are recorded on the debit sideof a company's balance sheet, and they come in a variety of types:

• Cash and Cash Equivalents: Assets that can be readily converted into cash, such as currency, demand deposits, and short-term financial instruments maturing within 3 months.
• Accounts Receivable: Claims arising from the provision of goods or services for which payment has not yet been received.
• Inventory: Goods or products, raw materials, etc., held for the purpose of sale.
• Tangible Assets: Assets with physical form, such as land, buildings, machinery, vehicles, etc.
• Intangible Assets: Assets without physical form, such as patents, trademarks, goodwill, etc.

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

Asset Classification: Current Assets and Non-Current Assets

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

Current Assets

These refer to assets expected to be converted into cash or consumed within a year. They are primarily composed of current assets and inventory.

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

Understanding Current Assets and Key Factors Investors Should Know

Current assets play a crucial role in a company's short-term operations and financing. Investors can analyze current assets to assess a company's financial status and future prospects. Here are key factors investors should know when understanding and analyzing current assets.

• Cash and Cash Equivalents: The most basic current asset, representing assets that can be immediately 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 interest income, so they should be considered together.
• Accounts Receivable: This refers to credit sales and promissory notes received from customers that have not yet been collected. By checking whether accounts receivable are being collected promptly and whether the allowance for doubtful accounts is appropriate, investors can evaluate a company's credit risk and collection potential.
• Inventory: Assets held for sale or in the production process. Analyzing the size and turnover rate of inventory can help determine the efficiency of a company's production and sales operations. The obsolescence or impairment of inventory is also an important checkpoint.
• Other Current Assets: In addition to the main items mentioned above, there are various forms of current assets, such as accrued income, prepaid expenses, and loans. These items are related to a company's specific circumstances and should be reviewed individually, considering them in relation to the company's business characteristics.

Non-Current Assets

These refer to assets used or held for investment purposes over a period of more than one year and are categorized into investment assets, tangible assets, 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.
• Tangible Assets: Physical assets held by a company for use in its business operations, such as land, buildings, structures, machinery, vehicles, etc.
• Intangible Assets: Non-monetary assets that are identifiable but lack physical form, such as industrial property rights (patents, trademarks, copyrights), development expenses, software purchase costs, etc.
• Other Non-Current Assets: Deferred tax assets, lease deposits, long-term receivables, etc.

These classified assets serve as important indicators for evaluating a company's liquidity and financial stability. A larger amount of current assets indicates a higher short-term financing capacity, and appropriate management of non-current assets can contribute to a company's 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 long periods, playing a crucial role in investor assessments of a company's financial status and operating performance. Non-current assets include the following types:

• Tangible Assets: Physical assets held by a company for use in its business operations, such as land, buildings, machinery, etc. The size and book value of tangible assets are important indicators for evaluating a company's production capacity and revenue-generating ability. However, it is essential to consider the costs associated with acquiring and maintaining tangible assets, as well as depreciation expenses.
• Intangible Assets: Non-physical assets that are identifiable, such as industrial property rights (patents, trademarks, copyrights), development expenses, and software purchase costs. Intangible assets are crucial factors in determining a company's future competitiveness and market dominance, but depreciation expenses and impairment losses must be considered.
• Investment Assets: Assets invested in other companies or financial instruments, such as stocks, bonds, and real estate. Fluctuations in the value of investment assets directly impact a company's financial performance, so investors should carefully examine the portfolio composition and investment strategies of investment assets.
• Other Non-Current Assets: Deferred tax assets, lease deposits, long-term prepaid expenses, etc. Each item is related to a specific situation of a company, so it is important to be cautious when analyzing financial statements.

These non-current assets reflect a company's past performance and current status, potentially impacting future revenue and cash flow. Therefore, investors should understand the classification and valuation methods of non-current assets and consider a company's financial status and management strategy comprehensively.

Asset Valuation Methods and their Role in Financial Statements

In financial statements, assets are one of the key factors representing a company's financial status and operating performance. Asset valuation is the process of measuring and evaluating the value of these assets, and the following methods are used:

1. Historical Cost: This method values assets at the price they were initially acquired. While this method provides objective information, it may not reflect the actual value of the asset if its value fluctuates over time.

2. Current Cost: This method values assets at the cost that would be incurred to acquire them at the present time. This method can reflect a more realistic value than historical cost, but it relies on estimates and may lead to errors.

3. Fair Value: This method values assets at their market price or the amount that could be received in exchange for the services provided. Fair value most accurately reflects the current value of assets, but if market prices are unavailable, estimates must be used.

These valued assets play the following roles in financial statements:

• Balance Sheet: It indicates the size and composition of assets, providing crucial information for evaluating a company's financial status.
• It is divided into current assets and non-current assets, and their characteristics and valuation methods should be considered.
• Income Statement: It indicates revenue and expenses associated with the disposal or use of assets, providing useful information for evaluating a company's operating performance.
• Examples include asset disposal gains or losses, and depreciation expenses.

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