Cash and equivalents Accounts receivable Inventory
Other current assets
Total current assets
3,415 8,568 5,699 5,562 23,244
4,500 950 6,265 11,715
Property, plant and equipment Goodwill
Total non-current assets
In accounting, assets are generally divided into fixed and current assets. Fixed assets (or non-current assets) and investments, such as buildings and equipment, will continue to be used by the business for a long time. Current assets are things that will probably be used by the business in the near future. They include cash - money available to spend immediately, debtors - companies or people who owe money they will have to pay in the near future, and stock.
If a company thinks a debt will not be paid, it has to anticipate the loss - take action in preparation for the loss happening, according to the conservatism principle. (See Unit 7) It will write off, or abandon, the sum as a bad debt, and make provisions by charging a corresponding amount against profits: that is, deducting the amount of the debt from the year's profits.
Manufacturing companies generally have a stock of raw materials, work-in-progress - partially manufactured products - and products ready for sale. There are various ways of valuing stock or inventory, but generally they are valued at the lower of cost or market, which means whichever figure is lower: their cost - the purchase price plus the value of any work done on the items - or the current market price. This is another example of conservatism: even if the stock is expected to be sold at a profit, you should not anticipate profits.
Tangible and intangible assets
Assets can also be classified as tangible and intangible. Tangible assets are assets with a physical existence - things you can touch - such as property, plant and equipment. Tangible assets are generally recorded at their historical cost (see Unit 7) less accumulated depreciation charges - the amount of their cost that has already been deducted from profits. This gives their net book value.
Intangible assets include brand names - legally protected names for a company's products, patents - exclusive rights to produce a particular new product for a fixed period, and trade marks - names or symbols that are put on products and cannot be used by other companies. Networks of contacts, loyal customers, reputation, trained staff or 'human capital', and skilled management can also be considered as intangible assets. Because it is difficult to give an accurate value for any of these things, companies normally only record tangible assets. For this reason, a going concern should be worth more on the stock exchange than simply its net worth or net assets: assets minus liabilities. If a company buys another one at above its net worth - because of its intangible assets - the difference in price is recorded under assets in the balance sheet as goodwill.
12.1 Find words and expressions in A, B and C opposite with the following meanings.
1 an amount of money that is owed but probably won't be paid
2 the accounting value of a company (assets minus liabilities)
3 a legal right to produce and sell a newly invented product for a certain period of time
4 the historical cost of an asset minus depreciation charges
5 the amount a company pays for another one, in excess of the net value of its assets
6 a legally protected word, phrase, symbol or design used to identify a product
7 to accept that a debt will not be paid
8 to deduct money from profits because of debts that will not be paid
9 products that are not complete or ready for sale
10 the amount of money owed by customers who have bought goods but not yet paid for them
12.2 Match the two parts of the sentences. Look at A, B and C opposite to help you.
1 A company's value on the stock exchange is nearly always
2 Brand names, trade marks, patents, customers, and qualified staff
3 Cash, money owed by customers, and inventory
4 Companies record inventory at the cost of buying or making the items,
5 Companies write off bad debts, and make provisions
6 Land, buildings, factories and equipment
a are current assets.
b are examples of intangible assets.
c are examples of tangible, fixed assets.
d by deducting the amount from profits.
e higher than the value of its net assets.
f or the current market price, whichever is lower.
of study. What are its most valuable
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Think about the company you work for, or your place assets? Are they shown on the balance sheet?
12.3 Sort the following into current, fixed and intangible assets. Look at A and C opposite to help you.
Current assets Fixed assets Intangible assets
The balance sheet 3: liabilities
Liabilities are amounts of money that a company owes, and are generally divided into two types - long-term and current. Long-term liabilities or non-current liabilities include bonds. (See Unit 33)
Current liabilities are expected to be paid within a year of the date of the balance sheet. They include:
■creditors - largely suppliers of goods or services to the business who are not paid at the time of purchase
■deferred taxes - money that will have to be paid as tax in the future, although the payment does not have to be made now.
Short-term debt 1,555
Accounts payable 5,049
Accrued expenses 8,593
Total current liabilities 15,197 Non-current liabilities
Deferred income taxes 950
Long-term debt 3,402
Other non-current liabilities 1,201
Total non-current liabilities 5,553
Total liabilities 20,750 Shareholders' equity
Common stock 10,309
Retained earnings 3,900
Total liabilities and Shareholders' equity 34,959
Because of the matching principle, under which transactions and other events are reported in the periods to which they relate and not when cash is received or paid, balance sheets usually include accrued expenses. These are expenses that have accumulated or built up during the accounting year but will not be paid until the following year, after the date of the balance sheet. So accrued expenses are charged against income - that is, deducted from profits - even though the bills have not yet been received or the cash paid. Accrued expenses could include taxes and utility bills, for example electricity and water.
Shareholders' equity on the balance sheet
Shareholders' equity is recorded on the same part of the balance sheet as liabilities, because it is money belonging to the shareholders and not the company.
Shareholders' equity includes:
■the original share capital (money from stocks or shares issued by the company: see Units 29-30)
■share premium: money made if the company sells shares at above their face value - the value written on them
■retained earnings: profits from previous years that have not been distributed to shareholders
■reserves: funds set aside from share capital and earnings, retained BrE" share premium* for emergencies or other future needs. | AmE: paid-in surplus
13.1 Are the following statements true or false? Find reasons for your answers in A, B and C opposite.
1 A current liability will be paid before the date of the balance sheet.
2 A liability that must be paid in 13 months time is classified as long-term.
3 A company's accrued expenses are like money an individual saves to pay bills in the future.
4 Shareholders' equity consists of the money paid for shares, and retained earnings.
5 If companies retain part of their profits, this money no longer belongs to the owners.
6 Companies can sell shares at a higher value than the one stated on them.
13.2 Find words in A, B and C opposite with the following meanings.
1 money that will be paid in less than 12 months from the balance sheet date
2 the money that investors have paid to buy newly issued shares, minus the shares' facc value
3 delayed, put off or postponed until a later time
4 built up or increased over a period of time
"Oh, that three billion dollars. "
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Look at the last two annual reports and balance sheets of your company or one you would like to work for. What differences do you notice in the balance sheets and what reasons can you find for these?
13.3 Sort the following into assets and liabilities. Look at A and B opposite to help you. You may need to look at Unit 12.