Asset Accounts Definition
Asset Accounts are used to identify the exact usage of stakeholder’s capital (Debt + Equity). They are reported at book values and are depreciated/amortized in the case of fixed assets and provisioned/expensed for in the case of current assets in the P&L.
Changes in asset values on the books of a company have to reflect in either the Profit and Loss Statement or the Cash Flow Statement.
An example would be if accounts receivable increased on the books, it meant an outflow of cash on the Cash Flow Statement. Similarly, if inventories decreased in the books, it means an inflow of cash due to products getting sold. A decrease in the gross block is expensed on the P&L through depreciation and an increase in the gross block is reflected by Capex capital expenditures under the Cash Flow Statement.
What do Asset Accounts tell us?
Once you are through with understanding how changes in asset reflect on the Financial Statements, it is important to understand how investors look at asset accounts of individual companies and match it with the industry to identify operating trends. We can compare companies operating across different industries and compare how many $ of revenue a tech company generates for every $ of capital invested vs. a manufacturing company.
We can also compare companies operating in the same industry like Walmart, Target, and Costco to determine which of them are converting products to cash the fastest and most efficiently. Investors can also identify trends across the entire industry. For eg: An agrochemical company’s receivables could be continuously increasing due to declining profitability of farmers. Such a trend would be visible across the Balance Sheet of the entire spectrum of agrochemical companies and it helps an investor identify that the industry is going through stress.
List of Asset Accounts
- Short Term Investments (Cash Equivalents)
- Accounts Receivables
- Pre-Paid Expenses
- Long term Investments
- Property Plant & Equipment
- Natural Resources
- Intangible Assets like Patents / Copyrights
What is a Fixed Assets Account?
- Also known as Non Current or Gross Block. These are investments made by the company in tangible and intangible assets, which the company believes will generate revenues in the future.
- Examples of tangible assets include property, machinery, equipment, land, and buildings. Intangible assets include patents, registrations, trademarks, and software.
- This is generally treated as “CAPEX” and is basically investments which the company believes will generate meaningful revenues in the future. A decision to incur Capex or not is based on the life cycle of the industry as well as the return on capital that can be generated.
How to analyze Fixed Asset?
- The fixed asset can be used to compare companies operating in the same industry as well as different industries. For eg: a company with an asset-light model like recruitment could generate equal revenues as a manufacturing company which would be requiring lots of investment in plant, machinery, etc. This gives the company with the asset-light model a high asset turnover ratio which is measured by Sales/Average Non-Current Assets.
- However, it is not necessary that the company generating higher revenue per dollar of non-current assets is a better investment. Manufacturing brings with it stickiness and a level of sustainable advantage; hence an investor must look at the overall scheme of things in the balance sheet and not one line item while making an investment decision.
What is Current Assets?
- Current Asset includes working capital investments for inventory, receivables which need to be collected from customers, as well as other liquid assets like current investments, fixed deposits, cash, and bank balances.
- Working capital is essential for every business and is a necessity to carry out all the operations effectively. A company’s bargaining power can impact its working capital requirements.
- If the company commands superior pricing power over its customers and suppliers, then they will be able to collect cash from its customers first and then pay its suppliers later, which will result in a positive net working capital.
How to analyze Current assets Account?
- Current assets account to reflect what is going with the company’s day to day operations. In public entities, the amount is reported once every quarter in the SEC 10-Q filing. It is extremely important to look at current assets as it indicates whether growth in revenues is being translated into cash or not. Most analysts make the mistake of ignoring the Balance Sheet and focusing on the P&L. Do not be that one!!
- So, if a company’s P&L indicates that it has grown revenues by 35% YoY and the receivables have also increased by a similar proportion, it means that the company has sold all its products on credit and not yet collected the cash. The increase in receivables is an asset (cash) that the company believes will materialize in the future. This is a common practice in companies operating across working capital intensive industries and in that instance we must compare firms by examining their cash conversion cycle (days in receivables + days of inventory on hand – days in payables).
What is Financial Assets Account
Financial assets account is reported under Non-current as well as Current assets. The idea of the word current is to determine if it’s a short term investment or long term investment. Generally, liquid investments are reported under current assets whereas non-liquid investments are reported under Non-current assets. Other types of assets include goodwill and deferred tax liabilities
Assets Accounts belong to the stakeholders, who are the debt and equity investors in the company. It is the responsibility of an investor to look at the assets reported by the company and understand its way of conducting business and if it will maximize value to shareholders in the future. Many companies are analyzed based on the assets they have on the books. The most common example is banks, as the intrinsic value of the bank is the interest it can generate from giving loans. Hence all these loans are assets for a bank and the value of a bank is determined by its Price to Book ratio relative to other banks. The book in this context is the book value of equity, which is the book value of assets – book value of
This has been a guide to the Asset Accounts definition and its meaning. Here we discuss the list of Asset Accounts and its types – Fixed Assets Account and current Assets accounts along with practical examples. You can learn more about accounting with the following articles –