net assets

Examples of net assets in the following topics:

• Characteristics of Intangible Assets

  • Intangible assets are identifiable non-monetary assets that cannot be seen, touched, or physically measured.
  • Goodwill is only recognized through an acquisition of a company or business combination and is calculated as the difference between the amount of money paid to acquire a company and the fair or book value of the acquired company's net assets.
  • Company $X$'s net assets total $$100,000 + $150,000 - $25,000 = $225,000$.
  • The extra $$300,000 - $225,000 = $75,000$ that Company $Y$ paid above Company $X$'s net assets are recognized by Company $Y$ as Goodwill on their balance sheet.
  • Impairment losses are determined by subtracting the asset's market value from the asset's book/carrying value.

• Return on Assets

  • The Return on Total Assets ratio measures how effectively a company uses its assets to generate its net income.
  • But while the asset turnover ratio is focused on the business's sales, return on assets is focused on net income.
  • $\frac { Net\quad Income }{ Average\quad Value\quad of\quad Total\quad Assets\quad for\quad Accounting\quad Period } =\quad Return\quad on\quad Assets$
  • $Return\quad on\quad Total\quad Fixed\quad Assets\quad =\quad \frac { Net\quad Income }{ Average\quad of\quad Fixed\quad Assets }$
  • Return on Total Fixed Assets equals the business's net income divided by the average value of the business's total fixed assets for the accounting period.

• Goodwill Impairment

  • Goodwill is an intangible asset that is tested yearly for impairment; it is not amortized.
  • A software company has net assets valued at $1 million, but the company's overall value (including brand, customers, intellectual capital) is valued at $10 million.
  • If there is an indication that the book value of goodwill is greater than the recoverable value of net assets, an assessment of the recoverable value is made, and if the suspicion is correct, then an impairment expense is recorded.
  • Goodwill's value on the balance sheet is reported at net of accumulated impairment loss, a contra asset account; the current impairment loss is reported on the income statement.
  • An impairment cost must be included under expenses when the carrying value of a non-current asset on the balance sheet exceeds the asset's market value subtracted by any transaction costs (recoverable amount).

• Valuation of Intangible Assets

  • The valuation of intangible assets are primarily derived from transactions involving intangible assets.
  • Since few sales of intangible assets are observable, benchmarking the value of intangible assets can be difficult.
  • Intangible assets are initially recorded on financial statements at their purchase price, or the cost of acquiring the asset.
  • Let's say Company A has net assets equal to 150,000 and is acquired by Company B for 200,000.
  • Company B believes that Company A has value in excess of their net identifiable assets, and was willing to pay an additional 50,000 to acquire it.

• Asset Turnover Ratio

  • The asset turnover ratio is a measure of how well a business is using all of its assets to generate sales.
  • $Asset\quad Turnover\quad =\frac { Net\quad Sales\quad Revenue }{ Average\quad Total\quad Assets }$
  • The asset turnover ratio is a measure of how well a business is using all of its assets to generate sales.
  • $Fixed\quad Asset\quad Turnover\quad =\quad \frac { Net\quad Sales }{ Average\quad Net\quad Fixed\quad Assets }$
  • The average fixed asset balance equals the beginning balance of fixed assets for the period plus the ending balance of fixed assets for the period, then dividing by two.

• Cost of Equipment

  • Fixed assets, also known as non-current or tangible assets, include property, plant, and equipment.
  • Fixed assets, according to International Accounting Standard (IAS) 16, are long range assets whose cost can be measured reliably.
  • Since accounting standards state that an asset should be carried at the net book value, equipment is listed on the balance sheet at its historical cost amount.
  • The cost is then reduced by accumulated depreciation to arrive at a net carrying value or net book value.
  • When an equipment is sold, the sale of the asset can trigger a gain or a loss, depending on the difference between the equipment's net book value and its sale price.

• Preparation of the Statement of Cash Flows: Indirect Method

  • This leaves us with the amount of $9,000 for net income.
  • changes in current assets (other than cash) and current liabilities, and
  • items that were included in net income but did not affect cash.
  • An increase in an asset account is subtracted from net income, and an increase in a liability account is added back to net income.
  • This leaves us with the amount of $9,000 for net income.

• Preparation of the Statement of Cash Flows: Direct Method

  • In short, they are elements of net income.
  • Cash outflows occur when operational assets are acquired, and cash inflows occur when assets are sold.
  • The resale of assets is normally reported as an investing activity unless it involves the purchase and sale of inventory, in which case it is reported as an operating activity.
  • This net income is then indirectly adjusted for items that affected the reported net income but did not involve cash.
  • The indirect method adjusts net income (rather than adjusting individual items in the income statement) for the following phenomena: changes in current assets (other than cash), changes in current liabilities, and items that were included in net income but did not affect cash.

• Defining Long-Lived Assets

  • Assets are economic resources.
  • Simply stated, assets represent value of ownership that can be converted into cash.
  • Assets represent probable present benefit, involving a capacity, solely, or in combination with other assets, to contribute directly or indirectly to future net cash flows, and, in the case of not-for-profit organizations, to provide services;
  • Since non-current, or long-lived, assets are expected to last for longer than one year, accounting treats long-lived assets differently according to their useful life.
  • When assets are expected to contribute to earnings for multiple years, such assets are referred to as long-lived, non-current or long-term assets.

• What Is Depreciation?

  • Depreciation for accounting purposes refers the allocation of the cost of assets to periods in which the assets are used (depreciation with the matching of revenues to expenses principle).
  • Depreciation expense also affects net income.
  • The depreciation method chosen should be appropriate to the asset type, its expected business use, its estimated useful life, and the asset's residual value.
  • The amount reduces both the asset's value and the accounting period's income.
  • Depreciation reflects the wear and tear experienced by an asset in use.