Imagine the House you own, or your parents own which will pass on to you in the future. If you decide to sell it today, it will fetch you money in return. Therefore that house becomes your Financial assets. The asset is something valuable that can fetch you money in return or gives you benefits. In other words “Financial Assets are resources with monetary value capable of generating benefit be it in cash or kind in future.” Let us discuss this more with examples below.
Assets like your House, Car, & your precious Diamond ring can be touched and felt. Another category of assets are those which you can only feel, but cannot touch or see like fragrance, music & love.
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In the same way all the assets fall under 2 categories: –
- Tangible Assets- Assets which can be seen, touched and felt.
Example- Fixed assets like plant, machinery, vehicles etc.
- Intangible Assets– Assets which cannot be seen, felt or touched physically.
Example- Goodwill, patents, brands, trademarks etc.
Again things that you benefit from in your day-to-day life can be of permanent nature. Consider your House which is bought with no EMI’s on it, or your Car with complete payment done is permanent. On the other hand, there are things are of temporary nature like Groceries- which you need to fill in every month, or Electricity which you need to pay the bill for based on monthly consumption.
Thus an Asset can be further classified into Current & Fixed Assets
- Fixed Assets– They are long term assets which are purchased for a long period of time, like 1 year. Thus it takes time to be converted to cash. The investment made on them is usually high & of capital nature.
Example- Plant, office, machinery, land, building, etc
- Current Assets– They are usually short-term assets, which can easily be converted into cash. These are also termed as liquid assets since they are purchased for very short span of time, with the intention to sell it off.
Example- Stock, raw material, short term investments, etc
The above examples of Financial assets will help you understand the term better.
Purpose of Depreciation/Amortization?
Normal wear & tear of an asset that occurs over a period of time is termed Depreciation.
In the case of Tangible assets – the term Depreciation is used.
In the case of Intangible assets- the term Amortization is used.
As discussed earlier the depreciation charged every year helps to accumulate sufficient funds to replace the old asset with the new one. Once the old one has completely depreciated or has become unusable you may buy a new one with those funds.
Analyzing Company’s Assets
What does increase in Fixed Asset amount Year on year in a Company means?
Whenever the Fixed Assets in a company’s balance sheet shows an upward trend YoY (considering the trend of atleast 5 year’s balance sheet). It indicates an expansion of business with the purchase of more fixed assets in the form of plants, equipment, offices. However, you also should look at the borrowing trend. If that also syncs with the upward trend of Fixed assets, then maybe borrowed funds are used to finance those purchases, which will increase the interest expense in the long run. However, if there is a downward trend reflected then maybe the company is not in the expansion mode, or maybe it is more virtually concentrated thus saving more on fixed costs.
Again do not jump to the conclusions as there could be other reasons as well for the upward or downward trends which may correlate with other financial figures.
Let us know what other reasons you can think of ?
- The top 10 companies this year based on Intangible Asset valuation as on Oct 2020 are Apple– valued at $2011 Billion, Amazon, Aramco, Microsoft, Alphabet, Facebook, Alibaba, Tencent, Tesla, and VISA.
- The world’s largest company by assets is ICBC with $4,035 Billion.
- Land is the only asset which does not depreciates. Rule of depreciation does not applies to it.
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