An asset is anything that an entity possesses or controls with the hope that it will contribute a future financial benefit. Assets are often acquired or created to enhance the value of a firm’s assets or profit the firm’s performance. The value of assets does not always equal the value of liabilities. The two are usually equal when all of the assets of a firm are accounted for.
In contrast, an asset is something that provides some future benefit to an entity that was an economic resource in the past. Some examples include tangible personal property, accounts receivable, and business intangibles. A company’s capital stock, retained earnings, short-term investments, and long-term investments are all types of assets. These assets are also reported on the balance sheet of the company.
Fixed assets are those that will not depreciate. Examples of fixed assets are equipment, inventory, and structures such as buildings. Some companies use their inventory or plant and equipment as intangibles, such as art or furniture. Examples of variable assets are financial instruments such as futures and options.
An asset is an item of value that has a direct relationship to the price or value of a liability. For example, the original cost of a Boeing airplane is more than the amount that a retail customer would pay for it if it were sold at the retail price. However, assets do not depreciate like liabilities do. They are only changed in terms of how the value of the assets or liabilities is evaluated at the end of a period of time, whether the period is one year or one month.
One important rule to remember when determining the value of a fixed asset is that the longer the assets’ value continues to increase, then the more valuable they are. This is similar to the maxim “the worth of a dollar is equal to the price paid for it”. The value of a short-term asset, such as inventory, can be determined by comparing it to the cost of producing it over a one-year period. Assets with a shorter useful life, such as fixed assets that have a lot of wear and tear over time, are much more difficult to evaluate. In many cases, a company would have to sell its fixed assets and liquidate its short-term assets to determine its long-term asset value.
To determine an asset’s value in terms of its fair market value, the gross value of the assets is multiplied by the total expenses incurred to produce them, and the gross value is then divided by the number of shareholders. By adding net assets to the gross value, the value of the corporation is calculated. It is necessary, however, to determine the net worth of an institution before applying the same method to other businesses. Under most current laws, an enterprise must disclose its capital and assets to comply with statutory requirements.
The accounting formula for calculating the value of an asset or firm is not difficult, but there are specific formulas that should be followed for each type of asset. For instance, if the company produces only non-liquid items such as fixed assets, the gross value will be based on the quantity of tangible assets minus the cost of production. The balance sheet should record the inventory, accounts receivable and accounts payable on an item-by-item basis, rather than reporting the gross value of the item.
The balance sheet should record the start-up cash cost of manufacturing, as well as the charge to wholesale and retail prices for any tangible assets. The inventory-to-equity ratio is another important measure of a firm’s ability to generate cash. Companies should track their inventory levels, which should include both end-of-day and end-of-month numbers. If a retailer has a steady level of inventory, he may want to add value to his business by purchasing inventory that is excess to his current levels. When a business is growing rapidly, it is necessary to immediately reinvest profits in growing assets, so that they do not have to be liquidated to repay existing debts. A company can accomplish this by purchasing low-cost raw materials that can be added to current inventory.