Asset

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Definition of an Asset:

An asset provides economic value to the owner by providing an economic benefit in the future.

Detailed Explanation:

An asset is a resource that can provide economic value to the owner. For a family, cash, a home, and a car are assets that benefit them in their daily lives. Investments in financial assets such as stocks, bonds, and CDs help families accumulate wealth to provide their future. Companies use their assets to gain an advantage in the marketplace by either creating cash inflows or reducing cash outflows. Assets are listed on the left side of a balance sheet. A value of a company’s assets must equal the total of the company’s liabilities and financial equity. 

Assets are broken into three categories:

Current assets are assets that can be converted into cash within a year. The following are examples of current assets.

  • Cash
  • Inventories
  • Marketable securities (stock, bonds, CDs)
  • Prepaid expenses
Fixed assets are long-term assets. Fixed assets are used up over a period of time. The reduction in value is the depreciation of the asset. Examples of fixed assets are:
  • Land
  • Building
  • Equipment
  • Vehicles
  • Software
  • Goodwill
Note that some assets are not reported on a balance sheet because they have not been purchased or are difficult to place a value on. For example, valuable employees are an asset to a company, particularly if the employee is difficult to replace. However, employees are not listed on a company’s balance sheet. An internally generated customer list is not listed, however a purchased list would be. A company’s outstanding reputation is not listed on the balance sheet. 

The added value is frequently reflected in the premium a company is willing to pay when purchasing another company. For example, PepsiCo Inc. paid about a 10 percent premium when it acquired Quaker Oats Company in 2001. The added value paid when acquiring a company will be reflected as goodwill on PepsiCo's balance sheet but never appeared on Quaker Oats Company's balance sheet. Assets that are frequently not listed on balance sheet include:

  • Management expertise
  • Patents
  • Brand Loyalty
  • Customer Lists
  • Intellectual Property

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