The Virtual CFO

Balance Sheet – Long-Term Assets

Long-term assets, sometimes called long-term investments, are assets that you plan to hold for a year or more.

Long-term assets are generally broken down into 4 categories:

1. Securities – include stocks, bonds, and long-term notes receivable.
2. Fixed Assets Not Currently Used in Operations – such as land acquired but not being used.
3. Special Funds – pension funds, funds for future expansion, and the cash surrender value of life insurance.
4. Nonconsolidated Subsidiaries and Affiliated Companies - accounting rules say that closely related companies must consolidate their financial statements into one set of statements. This category of long-term assets is for affiliate and subsidiary companies that are not considered closely held.

Current Asset Section of the Balance Sheet

The current assets section of the balance sheet reports the assets your company has that will be converted into cash in a year. On the balance sheet, the current assets are generally listed in order of liquidity, which is how quickly the assets will be converted into cash.

Below is a list of the common categories found in the current asset section of the balance sheet (listed in the normal order of liquidity):

• Cash – listed at its current balance on the date of the balance sheet. This includes your company’s savings and checking accounts.
• Short-Term Investments – listed at their fair value, which is the price you could sell the investment for now. This would include certificate of deposits and other similar short-term investments that are close to their maturity date.
• Accounts Receivable – reported at the amount you think you will actually collect from your total receivables. The accounts receivable balance is often reported showing total receivables less estimated bad debt.
• Inventories – presented in the basis you value your inventory, such as Costs, First In First Out (FIFO) or Last in First Out (LIFO).
• Prepaid Items – are expenditures you have already made for costs or services, such as insurance or equipment rent, that are paid in advance.

Overview of the Balance Sheet – What is My Company’s Financial Position Right Now

The balance sheet shows the financial position of your company on a specific date. Balance sheets are usually dated at the end of the month, such as September 30, 2009.

The balance sheet is composed of three sections:

1. Assets – include current assets (cash or other assets that will be converted into cash in a year or less), long-term assets (assets that will be held for a year or more), and property, plant, and equipment (durable assets used in the operations of the business).
2. Liabilities – include current liabilities (obligations that will be paid with assets in a year or less) and long-term liabilities (obligations that will take longer than a year to repay).
3. Owners Equity - includes capital stock (the cash and assets you contributed to start your business) and retained earnings (profit that has not been distributed to the owners).

Over the next few days, I will explain in more detail the three sections of the balance sheet.