Corporate Finance For Dummies. Michael Taillard
alt="math"/>
The first year represents
Intangible assets
Intangible assets are things that add value to a company but that don’t actually exist in physical form. Intangible assets primarily include the legal rights to some idea, image, or form. Here are just a few examples:
The big yellow M that McDonald’s uses as its logo is worth quite a bit because people recognize it worldwide. Imagine if McDonald’s simply gave that M, which it calls the “Golden Arches,” away to another restaurant. How much business would it attract?
The curved style of the Coca-Cola bottles, as well as the font of the words Coca-Cola, are worth a lot of money because, like the Golden Arches, they’re easy to recognize across the globe.
For pharmaceutical companies, owning the patent to some new form of medication can be worth quite a lot even if they’re not producing the medicine yet simply because the patent gives them the right to produce that medicine while simultaneously restricting other businesses from producing the same thing.
None of these examples can be physically touched, but they contribute to the value of the company and are certainly considered long-term assets.
Other assets
Any assets that a company hasn’t otherwise listed in the assets portion of the balance sheet go into an all-inclusive portion called other assets. The exact items included can vary quite a bit depending on the industry in which the company operates.
Learning about Liabilities
Liabilities include those accounts and debts that a company must pay back. Like assets, liabilities usually fall into two main categories:
Current liabilities: Liabilities that must be paid back, fully or in part, in less than one year
Long-term liabilities: Liabilities that must be paid back in a time period of one year or more
Current liabilities
This section lists the current liabilities you find on the balance sheet in order from those that must be paid in the shortest period from when they were incurred to those that can be paid off in the longest period from when they were incurred.
Accounts payables
Accounts payables include any money that’s owed for the purchase of goods or services that the company intends to pay within a year. Say, for instance, that a company purchases $500 in paper clips and plans to pay that amount off in six months. The company adds $500 to the value of its accounts payables. But after the company pays an invoice for the money it owes, it removes the value of that invoice from the accounts payables.
Unearned income
When a company receives payment for a product or service but has yet to provide the goods or services it was paid for, the value of what the company owes the customer contributes to its unearned income. Imagine, for example, that you own a dog polishing business that charges $10 per session. One of your customers pays $120 for monthly sessions, so your unearned income for that customer is $120 at the start. That value decreases by $10 every month as you provide the services that the customer paid for in advance.
Accrued compensation and accrued expenses
As a company utilizes resources such as labor, utilities, and the like, it must eventually pay for these resources. However, most companies make such payments once every week, two weeks, three weeks, month, and so on, not upon receipt of the resource.
Accrued compensation refers to the amount of money that employees have earned by working for the company but haven’t been paid yet. Not that the company is refusing to pay, necessarily, just that people tend to get paid once every one to four weeks. So until these people receive their paychecks, the amount that the company owes them is considered a liability.
Accrued expenses work in a similar way and are applied to such things as rent, electricity, water, and any other expenses that a company incurs and pays at regular intervals.
Deferred income tax
For tax purposes, sometimes a company chooses to report its income in a different period than when it actually earned the income. Although deferred income tax, as it’s called, can be quite useful for businesses in their attempt to reduce tax expenses in any given year, it does provide an additional concern for analysts. To clarify just how much a company owes in deferred income taxes, the company reports this amount in the liabilities portion of the balance sheet.
Current portion of long-term debt
Often companies pay long-term debt in small portions over the course of several years. The current portion of long-term debt that a company has to pay in the next year is subtracted from long-term liabilities (see the next section) and added as a part of the short-term liabilities. Not all companies include this category on their balance sheets, but it’s extremely common.
Other current liabilities
Companies include any liabilities that they have to pay within the next year and that they don’t specify elsewhere on the balance sheet in the liability category creatively called other current liabilities. This category can include a wide variety of things from royalties to interest to rebates and everything in between.
Long-term liabilities
This section outlines the categories you see in the long-term liabilities section of the balance sheet.
Notes payable
When a company owes money that it expects to pay in a time period that’s longer than one year, the value of that money goes into a category called notes payable. Often this category includes all loans and debt that the company is expected to pay over the long run. However, some companies choose to include any payments on bonds held for more than one year in a separate category called bonds payable.
Capital lease obligations
When a company leases a piece of capital, the total amount owed on that lease adds to the value of the capital lease obligations category of liabilities. As the company gradually pays the lease, each payment causes a deduction from this liability.
Eyeing Owners’ Equity
The owners’ equity portion of the balance sheet breaks down exactly what value the company has to its owners and how that value is allocated to them. The amount of value that investors have in a corporation is equivalent to the amount of total assets the company has minus its total liabilities.
