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Current Assets
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Current assets are cash and other assets that can be quickly converted into cash or that will be used within one year. Because cash is the most liquid asset, it is listed first. Following that are marketable securities—stocks, bonds, and so on—that can be converted into cash in a matter of days. These are temporary investments of excess cash that Northeast Art Supply doesn't immediately need.
Next are the firm's receivables. Its accounts receivable, which result from the issuance of trade credit to customers, are generally due within sixty days. However, the firm expects that some of these debts will not be collected. Thus it has reduced its accounts receivable by a 5 percent allowance for doubtful accounts. The firm's notes receivables are receivables for which customers have signed promissory notes. They are generally repaid over a longer period of time.
Northeast's merchandise inventory represents the value of goods that are on hand for sale to customers. These goods are listed as current assets because they will be sold within the year. Since Northeast Art Supply is a wholesale operation, the inventory listed in Figure 3.1 represents finished goods that are ready for sale to retailers. For a manufacturing firm, merchandise inventory can also represent raw materials that will become part of a finished product or work in process that has been partially completed but requires further processing.
Northeast's last current asset is prepaid expenses, which are assets that have been paid for in advance but not yet used. An example is insurance premiums. They are usually paid at the beginning of the policy year for the whole year. The unused portion (say, for the last four months of the policy year) is a prepaid expense—a current asset. For Northeast Art, all current assets total $182,000.
Fixed Assets
Fixed assets are assets that will be held or used for a period longer than one year. They generally include land, buildings, and equipment. Although Northeast owns no land or buildings, it does own delivery equipment that originally cost $110,000. It also owns furniture and store equipment that originally cost $62,000.
Note that the values of these fixed assets are decreased by their accumulated depreciation. Depreciation is the process of apportioning the cost of a fixed asset over the period during which it will be used. The amount that is allotted to each year is an expense for that year, and the value of the asset must be reduced by that expense. In the case of Northeast's delivery equipment, $20,000 of its value has been depreciated (or used up) since it was purchased. Its value at this time is thus $110.000 less $20,000, or $90,000. In a similar fashion the value of furniture and store equipment has been reduced by accumulated depreciation of $15,000. For Northeast Art, all fixed assets total $137,000.
| NORTHEAST ART SUPPLY, INC Balance sheet December 31, 20.. | |||
| ASSETS | |||
| Current assets Cash Marketable securities Accounts receivable Less allowance for doubtful accounts Notes receivable Merchandise inventory Prepaid expenses Total current assets Fixed assets Delivery equipment Less accumulated depreciation Furniture and store equipment Less accumulated depreciation Total fixed assets Intangible assets Patents Goodwill Total intangible assets Total assets LIABILITIES AND OWNERS’ EQUITY Current liabilities Accounts payable Notes payable Salaries payable Taxes payable Total current liabilities Long term liabilities Mortgage payable on store equipment Total long term liabilities Total liabilities Owners’ equity Common stock, 10,000 shares at $15 Par value Retained earnings Total owners’ equity Total liabilities and owners’ equity | $40,000 2,000 $110,000 20,000 62,000 15,000 $ 35,000 25,000 4,000 6,000 $ 40,000 | $59,000 1 0,000 38,000 32,000 41,000 2,000 $90,000 47,000 $ 6,000 15,000 $ 70,000 40,000 $150,000 80,000 | $182,000 137,000 21,000 $430,000 $ 110,000 230,000 $ 340,000 |
FIGURE 3.1
Intangible Assets
Intangible assets are assets that do not exist physically but have a value based on legal rights or advantages that they confer on a firm. They include patents, copyrights, trademarks, and goodwill. By their nature, intangible assets are long-term assets. They are of value to the firm for a number of years.
Northeast Art Supply lists two intangible assets. The first is a patent for an oil paint that the company has developed. The firm's accountants estimate that it has a current market value of $6,000. The second intangible asset, goodwill, is the value of a firm's reputation, location, earning capacity, and other intangibles that make the business a profitable concern. Goodwill is not normally listed on a balance sheet unless the firm has been purchased from previous owners. In this case, the purchasers have actually paid an additional amount (over and above the value of the previous owners' equity) for this intangible asset. The firm's accountants included a $15,000 amount for goodwill. For Northeast Art, intangible assets total $21,000. Now it is possible to total all three types of assets for Northeast Art. As illustrated in Figure 3.1, total assets are $340,000.
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