 Hello and welcome to this recording in which we'll keep working with the balance sheet or the statement of financial position. This is CPA exam bootcamp part two of three. In this session we're going to be working with the balance sheet. Specifically we're going to be focusing on the asset section of the balance sheet. In the prior session we looked at an overview of the balance sheet, the elements of the balance sheet, the usefulness, the limitation. In this session we'll focus on the assets. In the next session I will focus on the liabilities and equities. This topic is typically covered also in an intermediate accounting course. Now whether you are an accounting student or a CPA candidate I strongly suggest you take a look at my website farhatlectures.com. I don't replace your CPA course whether you are using Becker or any other course. I'm a useful addition. 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Take a look at my LinkedIn recommendation like this recording, share it with other connect with me on Instagram, Facebook, Twitter and Reddit. So in this session we will be focusing as I said on the asset side of the balance sheet starting with current assets and what's going to happen is this. I'm not going to keep repeating this when I cover every account but look this is an overview, really, really an overview. Here's why because as we progress further in the course as actually I do have those lectures ready, as we progress further each of these topics for example cash, investments, receivable, inventory each of these accounts I will devote a whole chapter which is for example for cash I might have four to five lectures just about cash, about account receivable I might have four to five lectures about inventory so on and so forth. So in this session I'm going to give you an overview what the balance sheet looks like but there are much, much more about these topics in future chapters. Actually there are whole chapters devoted for these topics but let's start to define current assets. So this is an overview. What are current assets? Well current assets are assets which we know what assets are resources that the company owns and controls for the benefit of the company but those assets they expect it to be converted to cash. So we could always assume that cash is a current asset, sell or consume within one year or the company's operating cycle whichever is which ever is longer we're going to assume that the company's operating cycle is long I'm sorry we're going to assume one year is longer therefore any asset that's going to be sold, consumed or converted to cash. For example cash is already cash that investments if we have an investment and we expect to sell it converted to cash it will be current asset we may not want to sell it if it's not here if it's the intent of us is not to be here then it will be somewhere else which we'll see it will be under long-term investment account account and notes receivable if they are expected to be converted to cash their current assets income taxes receivable inventory prepaid those are all accounts they are either expected to be converted to cash sell or consume within the next 12 months within the next year. Now specifically we're going to see how we value those accounts for example cash and cash equivalent which we'll talk a little bit more about shortly they are valued at fair value it means when we list them we list them at how much they are worth short-term investments generally they are listed at fair value receivable they are listed at something called net realizable value or net receivable it means how much can how much can we get from the receivable simply put we're going to have the receivable minus some sort of an allowance so it's called net receivable it's how much it means how much we can collect in our receivable so we might have a million dollar of receivables and minus 25 000 that we cannot collect the net receivable will be 975 and don't worry we'll talk about this the point what i'm trying to show here is the valuation is different for each asset inventories we value inventory at lower of cost or net realizable slash or lcm lower of cost or market prepaid expenses and supplies we report them at cost so notice cost is used but not as much as we think it's used anyhow now we need to dig a little bit deeper into each one of these current assets to discuss them starting with cash and cash equivalent so basically this is a current asset these these are the total current assets for example what do we need to discuss or show in the balance sheet about cash and cash equivalent we need to know what is cash and what's cash equivalent specifically cash equivalent we all know what cash is for example this company here might say c-note 5 and we say we classify all highly liquid instrument with an original maturity of three month or less as cash equivalent so here they tell us what cash equivalent is and what they can do too if they have a lot of cash equivalent they can list them they can for they might have commercial taper they might have us treasury whatever it is they would list them for example the company might have some restricted cash if they have restricted cash it means cash that they cannot use they have to tell us what's that restricted cash is about well restricted cash consists of cd certificate of deposit restricted escalator for that services at bank of america for interest ranging from 8 to 10 percent simply put we might we have loans from that of america and that of america says look part of our deal maybe they lent us a lot of money to keep 75 000 restricted you cannot touch it well we have to tell the investors that that 75 000 is not available for you because remember the balance sheet tells the investors what's available in terms of resources those resources are not available restricted cash is not available that investment well that investments is any sort of investment it could be that investment it could be equity investment it could be any sort of an investment gold investment invest in gold invest in cryptocurrency it's some sort of an investment but the intent is to sell it in the near future within the next 12 months it's listed under current assets and for example if it's a debt investment or any investment the company will show a detailed schedule for example that investments are reported at fair value this no this way we know this number is reflected the fair value in the following schedule as summarizes the estimated value for example we have corporate notes the fair value 100 000 municipal bond us government securities and this is the 230 000 that ties now this is a simple illustration in the real world the company might be a little bit more involved they might they might have equity investments they have to reconcile everything that this is the basic idea the next thing we're going to discuss and again we're going to talk much much more about investment in future chapters i mean we could have all sorts of investments we could have hold to maturity we could have trading available for sale we don't worry about this now all we're worrying about now is the structure of the balance sheet the next thing we're going to discuss is the receivable we have accounts and notes receivable and we have income taxes receivable again as i told you receivable is reported as net whether it's account or notes and what's going to happen the company will explain what the receivable is all about what's where is the receivable is coming from account receivable net of net and other but basically net receivable on our consolidated balance sheet our amount primarily related to customers so basically this this receivable is coming for customer we estimate losses which is the allowance account based on known troubled account and historical experience of losses incurred so they tell us how do they come up with that allowance again we're going to have a whole chapter about this receivable are considered impaired and written off when it's probable that all contractual payment do will not be collected in accordance with the term of the agreement so they tell us here also when do they write off an account well when the contractual obligation is not met we don't think it's going to be met we write off the account okay the allowance for doubtful account was blah blah blah they will tell us what method they are using for the allowance so on and so forth so in addition to the figure in addition to the figure we have to show the note for example here we also have an income tax is receivable and the note for this is as a result of a settled net operating dispute and our favor with the irs we expect a refund of seven thousand dollar from the federal government so we have to let you know what is that seven thousand well it has to do with a dispute with the government about the net operating loss we want that dispute we're waiting to be refunded seven thousand dollar so simply put we show the numbers and wish if there's any needed always there's needed information we have to show it in the notes inventory for some companies inventory is a huge number well it's not only we show the inventory we have to show how do we account for this inventory how do how do we value the inventory well first of all we define inventories consist of product available for sale we're using FIFO first and first out method we value them at lower of cost in net realizable value don't worry about the terminology if it does not make any sense it will make sense once we cover FIFO once we cut once we cover the lower of cost the valuation require us to make a judgment based on currently available information notice here we make a judgment and this is one of the limitation of the balance sheet is when certain numbers are judged we make a judgment on them they're not real we decide what that number is for example we might have to write down inventory based on currently available information likelihood of disposition such as through sales to individual customers return to product vendors or liquidation and expected recoverable values of each disposition category so simply put when we looked our inventory we gave you this number this number include our judgment about returns include our judgment about the value of these inventory today in terms of how sellable they are a return of product vendors so on and so forth so do we give you all information and this is basically a snapshot and i believe this is from amazon this i get this note from amazon um prepaid expenses there's not much to talk about prepaid expenses it could be listed just prepaid expenses if there's anything relevant they will tell us so this is basically the current section of the balance sheet right after the current asset comes non-current assets and the rest are typically non-current and under non-current we could have long-term investments what are long-term investments well long-term investments are investments held longer than one period the intent is longer than one period because if you look at the current assets we have also investments but those are st short-term it means we're going to sell them in the near future well we could have investments that's going to be long-term longer than one year and we we list them in their own categories so what can we invest in we could we could invest in practically anything gold cryptocurrency stocks bonds usually investments are reported at fair value for example if it's a stocks if it's bonds it's either at amortized cost or fair value depending on the classification remember those are stocks and bonds of other companies sometimes they are called securities we call them securities also we list under long-term investments non-consolidated subsidiaries or affiliated companies companies that we have either and we have significant control in okay and these are treated using something called the cost method or the equity method and this is one course by itself but if we own more than a certain percentage but less than other percentage if we own more than 20 but less than 50 we might account for the investment differently if we own more than 50 we account for it totally different but the point is here you don't have to know all this information you have to know that if you have a significant investment in a company well you don't buy it to trade a significant significant amount you you trade and you invest in a company if it's a significant amount for a longer period of time therefore it's listed under long-term investments also we could have here fixed tangible asset held for speculation not operation so for example you might have land building but it's not to use them in your operation it's you bought a piece of land and you want to flip it you want to sell it when the price is right so you're not using it therefore it's called investment not called property plant and equipment and here's a section of investments for example investments the company would have additional notes for example this company have an equity investment of 750 that investments of 300 and they will tell us in the note what is this all about investment and that securities are classified as available for sale carry that fair value changes in fair value is reported in comprehensive income again this may not make sense to you now but it will make sense to you later on certain investment will be accounted for using the equity method if the company has significant influence in the equity to just tell us if they have significant influence and the company assesses the client in fair value of debt securities and equity investments to determine if such decline other than temporary simply put we have to assess for any impairment this assessment is made considering all available evidence including changes in the general market condition specific industry individual data etc so they tell us also if we need to impair those investments what do we do to impair them what factors do we take into account so they tell us not only the numbers but how they value the numbers and in case there was any impairment how do they account for those impairments and this is what we do under long-term investments another section is an on-current section is property plant and equipment and those are assets that are used in operation in regular operation in their long-lived it means they last for several years examples will be land building machinery furniture tools natural resources or wasting resources are listed here those assets are reported at what we call the book value or carrying value it means net of accumulated depreciation for example we don't depreciate land and natural resources net of depletion but the point is they are carried at book value and this is what they look like on the balance sheet for example you could have land building machinery total then minus accumulated depreciation and will have the net amount which is 535 so we add them all up minus any accumulated depreciation remember land is not depreciable therefore there is no depreciation for land in this number 120 and again the company will have to tell us a little bit more about their property plant and equipment first thing stated at cost we report them at cost and that's important minus accumulated depreciation then they have to tell us how do they compute depreciation and we're going to have a one whole chapter about this using the straight line basis based on the estimated useful life notice here we're using estimates again another weakness in in in the balance sheet leasehold improvement one to 20 years machinery and equipment one to 15 years so on and so forth so they tell us exactly what they do and they tell us that there are maybe subject to impairment assessment and using the recoverability of the carrying value test don't worry about this you will learn about this later this the point is you don't only show the numbers you show how you account for these numbers how you value those numbers right after property plant and equipment we could have a section called intangible asset and for many companies that's a huge section for example for pharmaceutical companies intangible assets represent a huge portion of their assets more than 50 percent way more than 50 percent so what are intangible assets intangible assets are assets that lack physical substance but they are used in operation what are they patent trademark trade name franchise goodwill now again i keep saying this we're gonna have one whole chapter about those assets intangible assets but what are they what is a trademark or a trade name basically this name here is a trademark or a trade name so basically it's an asset that coca-cola uses but it basically lack physical existence it doesn't really exist franchise for example if you want to operate a mcdonald you have to pay a fee to be able to put their name and use their use their brand therefore it's called a franchise fee it's an intangible asset the right to use that name goodwill is another asset and goodwill is created when one company buys another company i'm going to give you a quick example just to kind of move on with goodwill but goodwill is an important topic to be to be to be dealt with later on for example if a company is worth their fair value of their assets are 100 000 and the the fair value of of their liabilities again i'm using the fair value number is 60 000 to be more specific if the fair value is 60 000 we can say that the company is worth 40 000 the company is worth 40 000 if you buy this company for something other than 40 000 more than 40 000 it means you are paying for something else that's something else if you cannot identify a specific asset then it's called goodwill so if you paid 80 000 for this company and it's worth 40 remember it's worth a fair value 40 fair value of assets minus the fair value of liabilities then you paid 40 000 extra okay 80 is for so you paid 40 000 for the assets and you paid an additional 40 000 assuming you cannot identify an asset to assign those 40 000 to you would say this this is called goodwill okay those assets are reported at book or carrying value net of accumulated amortization for limited life assets so these assets some of them are limited life if they have limited life they get amortized and any unlimited any unlimited life intangibles are subject to impairment they are reported at cost and we we we we test them for impairment every year and again that's all you have to know is what good what goes into the intangibles and what what categories goes in there and that's all you have to know for now again this topic is covered much much more in details and this is a sample of of an intangible asset balance sheet right here they're listed at cost cost right here 389 minus accumulated amortization again goodwill is not subject to amortization will give us the book value of book value or the carrying value okay and they tell us here for example how what how do they treat goodwill it's assessed at least annually at the reporting unit or more frequently if if events or circumstances requires it they tell us what factors they use an impairment macroeconomic condition industry and market condition and it tells intangible assets are amortized using the straight line so we're using the straight line basis again all this topic will be covered later i know i keep saying this because i don't want you to think oh my god i don't know this you know is there something wrong with me not at all this is this is just an overview of the balance sheet of the asset section of the balance sheet i'm just giving you like a sense of what's kind of what's coming next and we might have some companies might have other assets this is a catch all category and it varies in practice here you could have anything that doesn't fit under these four categories current assets long-term investments property planning equipment and intangible asset you could have long-term prepaid you could have long-term receivables but long-term receivable sometime goes under investments it all depends on what the management intent is you could have restricted cash in this category cash that you are restricting for longer period of time again it's a catch all it's a catch all category at the end of this recording once again i'm going to remind you if you are studying for your CPA exam to take a look at my resources give me a chance give me a look i can help you pass your risk is one month of subscription your potential gain is actually passing okay invest in yourself invest in your career you're going to study once for the CPA exam throw everything on it my nominal fee is not going to break you try it for a month you like it you keep it you don't you cancel good luck study hard and of course stays