AC 210 Lecture Notes - Lecture 1: Capital Account, Promissory Note, Preferred Stock
5 Jun 2018
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The Accounting Equation
The ability to read financial statements requires an understanding of the items they
include and the standard categories used to classify these items. The accounting
equation identifies the relationship between the elements of accounting.
Assets. An asset is something of value the company owns. Assets can be tangible or
intangible. Tangible assets are generally divided into three major categories: current
assets (including cash, marketable securities, accounts receivable, inventory, and
prepaid expenses); property, plant, and equipment; and long‐term
investments. Intangible assets lack physical substance, but they may, nevertheless,
provide substantial value to the company that owns them. Examples of intangible assets
include patents, copyrights, trademarks, and franchise licenses. A brief description of
some tangible assets follows.
• Current assets typically include cash and assets the company reasonably
expects to use, sell, or collect within one year. Current assets appear on the
balance sheet (and in the numbered list below) in order, from most liquid to least
liquid. Liquid assets are readily convertible into cash or other assets, and they
are generally accepted as payment for liabilities.
1. Cash includes cash on hand (petty cash), bank balances (checking,
savings, or money-market accounts), and cash equivalents. Cash
equivalents are highly liquid investments, such as certificates of deposit
and U.S. treasury bills, with maturities of ninety days or less at the time of
purchase.
2. Marketable securities include short-term investments in stocks, bonds
(debt), certificates of deposit, or other securities. These items are
classified as marketable securities—rather than long-term investments—
only if the company has both the ability and the desire to sell them within
one year.
3. Accounts receivable are amounts owed to the company by customers
who have received products or services but have not yet paid for them.
4. Inventory is the cost to acquire or manufacture merchandise for sale to
customers. Although service enterprises that never provide customers
with merchandise do not use this category for current assets, inventory
usually represents a significant portion of assets in merchandising and
manufacturing companies.
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Document Summary
The ability to read financial statements requires an understanding of the items they include and the standard categories used to classify these items. The accounting equation identifies the relationship between the elements of accounting. An asset is something of value the company owns. Tangible assets are generally divided into three major categories: current assets (including cash, marketable securities, accounts receivable, inventory, and prepaid expenses); property, plant, and equipment; and long term investments. Intangible assets lack physical substance, but they may, nevertheless, provide substantial value to the company that owns them. Examples of intangible assets include patents, copyrights, trademarks, and franchise licenses. A brief description of some tangible assets follows: current assets typically include cash and assets the company reasonably expects to use, sell, or collect within one year. Current assets appear on the balance sheet (and in the numbered list below) in order, from most liquid to least liquid.
