Asset Classes That Bring Long-Term Benefits
Assets can be categorized in different ways, but the main classes are tangible and intangible. They can be subdivided into fixed and current, and examples include furniture, machinery, and real estate.
Intangible Assets and Economic Benefits
Brands, goodwill, and intellectual property fall in this category. Some of these assets have an unlimited life and can be used as long as the company is in business. One example is trademarks. Copyrights and patents have a limited life. They lack a physical form or substance and cannot be damaged or destroyed by natural disasters such as floods, tornadoes, fire, or hurricanes. These assets offer long-term benefits but are not usually used or accepted as collateral to secure loans. A patent, for example, grants exclusive rights to an inventor. The goal is to prevent the copying, production, distribution, and sale of a product or service by other parties. The rationale is that a patent offers incentives to companies and individuals to create and invest in new products that drive development and economic growth. Copyrights are another example and refer to a legal right to sell or reproduce works of art, songs, and books. Government licenses, franchise licenses and trade names are also intangible assets.
Tangible Assets, Examples, and Depreciation
This is another category that includes land, real estate property, inventory, machinery, and equipment. The common between them is that they have a physical substance and form. Items that have a long useful life are considered long-term assets. Examples include plants and land. With the exception of land, buildings, machinery, and other items or things that a company owns are depreciated for accounting purposes. This means that their value decreases with time. Land is recorded at its historical price on the balance sheet regardless of whether its value increases or decreases.
Fixed Assets and Liquidity
Non-current or fixed assets are relatively illiquid meaning that they are not easily convertible into cash. Thus, it takes time to sell them to customers, businesses, or investors. Machinery and equipment, fixtures and fittings, and furniture fall in this category. They are used by companies over long periods of time. Other examples include cars, trucks, plants, and land. Their proper management involves monitoring, depreciation, replacement, and repair. Tracking the value of equipment and its depreciation translates into lower insurance premiums and taxes. Accurate forecasts are another benefit because depreciation allows accountants to calculate losses and profits.
Current Assets, Types, and Maturity
This is another category that includes bank accounts, cash, marketable securities, inventory, and accounts receivable. They are easily converted into cash, which makes them liquid. The main benefit for companies is that they can pay their liabilities and loans quickly. They don’t have to sell machinery, equipment, vehicles, and buildings. What is considered a current asset depends on the nature and operations of the company. They can range from groceries and cleaning products to crude oil, coal, gas and foreign currencies. There are different types of marketable securities such as treasury bills, banker’s acceptances, and commercial paper. The common between them is that they have a maturity of less than 1 year. The rate at which investors buy and sell marketable securities has a little effect on their value. There is a difference between treasury bonds, notes, and bills. Treasury bonds are long-term securities with a maturity of up to 30 years while notes have maturities of up to 10 years. T-bills, on the other hand, are short-term securities with maturities of 1 to 13 months. Commercial paper is another example and a debt instrument issued by businesses. It has a maturity of up to 1 year and is used to meet short-term liabilities or to finance company inventory and accounts receivable. Given that these debt obligations are not backed by some valuable asset, only reputable, established companies sell them at a good price.
Inventory, accounts receivable, short-term investment instruments, and cash equivalents are other examples. Cash equivalents, for instance, include short-term government bonds and money market instruments. In general, they have a maturity of less than 3 months, which makes them very liquid. Preferred stock can be classified as a cash equivalent under certain conditions. Common stock is not, however, because it represents ownership.
Current assets are important for companies because of their relative liquidity. Financial institutions often base their decisions on the type and amount of current assets that a business has. The reason is that they are easy to liquidate (sell) in case that the borrower defaults or goes bankrupt.
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