What is an Asset?
An asset is an economic resource that a) can be owned, and b) is expected to provide future economic benefits.
How Does an Asset Work?
A company lists its assets on its balance sheet. Common asset categories include cash and cash equivalents; accounts receivable; inventory; prepaid expenses; and property and equipment. Although physical assets commonly come to mind when one thinks of assets, not all assets are tangible. Trademarks and patents are examples of intangible assets.
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Assets are presented on the balance sheet in order of their liquidity. Current assets, which are expected to be consumed or converted to cash within one year, are listed at the top. Cash, short-term investments and inventory are examples of current assets.
Long-term assets, or fixed assets, are expected to be consumed or converted to cash after one year's time, and they are listed on the balance sheet beneath current assets. Property (such as office space or buildings) and equipment are common long-term assets.
Investors buy assets with the understanding that assets should hold, or even better, grow their economic value over time. Common asset classes for individual investors include stocks, bonds, cash, foreign currencies, collectibles, precious metals, real estate and commodities. A collection of assets is called a "portfolio," and it is widely believed that an individual's portfolio should include assets from several different categories, a process called "asset allocation."
Why Does an Asset Matter?
Assets create or preserve wealth, making them of utmost importance to both individuals and companies.
Financial analysts are encouraged to carefully study a company’s financial statements, including the balance sheet. By using the practice of ratio analysis, an analyst can determine how good a company is at using its assets to generate wealth for shareholders. Read on to learn how to use the following ratios: