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Topic 2

Accounting and Finance for Business


(BUS1AFB)
Semester 1, 2014
STATEMENT OF FINANCIAL
POSITION
Topic Intended Learning Outcome 1
By the end of this presentation you should
be able to:
Understand and apply the criteria for defining
and recognising assets.

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La Trobe Business School
Assets - Questions
1. Why does a business need assets?
2. What is the definition of an asset?
3. What are the characteristics of an asset?
(Asset recognition)
4. What are the categories of assets? (Asset
classification)
5. What does the listing of assets tell us about
the business?
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Land
Equipment
Buildings
Cash
Motor
Vehicles
Inventory
Notes
Receivable
Accounts
Receivable
Resources
owned or
controlled by a
business
Assets
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Q1: Why does a business need assets?
The function of assets is to generate sales
for the business. Ultimately, the function of
assets is to generate cash for the business,
so that the business can be continue
carrying on the business into the future (a
sustainable business).

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Q1: Why does a business need assets?
Money is invested by the business in a
variety of assets such as inventory,
equipment, motor vehicles, buildings,
computer systems etc., the objective of this
investment in assets is to assist the business
in generating sales.


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Q1: Why does a business need assets?
Assets are required by a business to create
wealth for the business, its owner(s) and
(arguably) society/community/local,
national and global economy.


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Q2: What is the definition of the term
assets?
Assets are a businesss economic resources
that it expects will provide future benefits to
the business.
Assets are resources that are invested in the
business intended to generate revenue and
profit.
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Q2: What is the definition of term
assets?
Assets are economic resources that are
objectively measurable, that result from a
prior transaction and that will provide future
economic benefit.
The Australian Accounting Standards Board
(AASB) definition of an asset is on the next
slide.
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Q2: What is the definition of assets?
the AASB definition
a resource controlled by the entity as a
result of past events and from which
economic benefits are expected to flow to
the entity

Paragraph 49 (a) AASB Framework for the Preparation and Presentation of
Financial Statements, September 2009 (AASB = Australian Accounting Standards
Board)
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Applying the definition of the term
assets
An example of an asset of a business is cash:
It can be counted (measurable).
It is received via a transaction with someone else
(for a business it is usually results from a prior
transaction with a customer).
And
It can be used to buy things in the future (future
economic benefit).
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Q3: What are the characteristics of an
asset?
Main identifying characteristics of an asset
are:
1. Expected future economic benefit.
2. The business has exclusive right to control the
benefit.
3. The benefit must arise from some past
transaction or event.
4. The asset must be capable of reliable
measurement in monetary terms.
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Q3: What are the characteristics of an
asset?
These characteristics limit the kind of items
that may be referred to as assets in the
financial statements (statement of financial
position).
All four characteristics must be present for
an asset to be recognised and included in
the financial statements of a business.
Lets have a closer look at these
characteristics.
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Q3: What are the characteristics of an
asset?
1. Expected to have future economic benefit.
What does this statement mean?
An asset is expected to have the potential to
generate cash flows (in the form of cash and/or
cash equivalents) through either its use or
through its sale for the business.
In other words, to be considered an asset, an
asset must be able to generate cash for the
business in the future.
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Q3: What are the characteristics of an
asset?
Future economic benefits can be generated in a
number of ways:
Assets may be used individually or with other assets
in combination to produce goods (inventory) that
will be ultimately sold to customers generating cash
or cash equivalents.
Assets may be used individually or with other assets
to provide services to customers generating cash or
cash equivalents.

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Q3: What are the characteristics of an
asset?
Assets may be used to settle liabilities in kind or by
converting into cash.
Assets may be used for exchange purposes to
acquire other assets.
Assets may be distributed to owners of the business
(e.g. at the time of liquidation or when dividends are
paid).

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Q3: What are the characteristics of an
asset?
Example of an asset that is generating a future
economic benefit is:
For a manufacturing business, a machine that is
used in the manufacture of a product that is
ultimately sold to a customer for cash is an
asset as it assists in the generating of a future
cash flow for the manufacturing business.
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Sewing machine
Customer
Cash
Q3: What are the characteristics of an
asset?
2. The business has the exclusive right to
control the benefit.
What does this mean?
The asset and the future monetary benefit that
the asset generates must be owned or controlled
by the business.
The right of ownership is not essential for an
item to be considered an asset as long as the
future economic benefit is controlled by the
business.
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Q3: What are the characteristics of a
asset?
Example of an asset that is not owned by
the business but provides future benefits to
the business is:
Leased equipment.
It provides future benefits as it is integral to the
production process.
The machinery is owned by the leasing
company not the business using the equipment.
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Q3: What are the characteristics of an
asset?
If the business maintains the leased equipment and
can locate the equipment where they want to
without needing permission of the leasing
company etc. The leased machinery is
controlled by the business.
The leased equipment meets the criteria for being
an asset of the business. The asset and the future
monetary benefit generated by the the asset is
controlled by the business.



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Q3: What are the characteristics of an
asset?
3. The benefit must arise from some
past transaction or event.
What does this statement mean?
a transaction or other event giving the entity control over
the future economic benefits must have occurred in the
past. This means that a deal to purchase an asset has
been done between two or more parties it is not just the
planning or thinking about making the deal, the deal
actually has to have taken place for an asset to be
recognised. The organisation has made the purchase and
can have a moral or legally enforceable obligation to pay
for the purchase.
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La Trobe Business School
Q3: What are the characteristics of an
asset?
4. The asset must be capable of reliable
measurement in monetary terms.
What does this statement mean?
Generally establishing the cost or value of assets is
straightforward, they are generally recorded at
(historical) cost you would have a document detailing
the description of the asset and the dollar price that you
paid the supplier for the asset this is a reliable
measure in monetary terms of the asset.

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Q3: What are the characteristics of an
asset?
Sometimes, assets such as goodwill, brand names, trade
marks, patents and copyrights are internally generated
by the organisation and they certainly met the first three
criteria for recognition as an asset however because
they cannot be reliably measured in monetary terms
they are not recognised in the financial statements.



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Q3: What are the characteristics of an
asset?
However, assets such as goodwill, brand names, trade
marks, patents and copyrights purchased from parties
external to the organisation are included in the
financial statements as their cost can be reliably
measured as there is a dollar price that was paid by the
organisation for the purchase of the goodwill, brand
names, trade marks, patents and copyrights.


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Assets - Examples
Items that often appear as assets in a balance sheet include:
Freehold premises
Machinery and equipment
Fixtures and fittings
Patents and trademarks
Accounts receivable (Debtors)
Inventory and Investments
Prepaid expenses (prepaid insurance etc.)

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Business Assets versus Personal Assets
There are three broad business forms
1. Sole proprietorship
2. Partnership
3. Company
All of these business forms account for the
business separately to the owner(s) personal
affairs. Personal assets must not be included in
the businesss financial statements.

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Business Entity Forms
Sole
Proprietorship
Partnership Company
One owner of the business
the hairdresser
Two or more owners of the
business
Many owners of the
business shareholders
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Q4 What are the categories of assets?
The business assets can be categorised on
the basis of:
1. The physical form of the asset, whether the
asset is tangible or intangible.
And
2. The liquidity of the asset, whether the
asset is current or non-current.
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Q4 What are the categories of assets?
Assets that have real, physical substance are
called tangible assets. You can see them,
you can touch them.
Examples of tangible assets are:
Inventory
Freehold buildings
Plant and equipment
Furniture and fittings
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Q4 What are the categories of assets?
Assets that do not have real, physical substance
but still represent future benefits to the business
are called intangible assets.
Examples of intangible assets are:
Copyright
Trademark
Brand name
Patent
Goodwill

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Q4 What are the categories of assets?
Assets are normally classified as current
and non-current based on their liquidity.
What does current and non-current
mean?
Current assets = short-term assets, those
assets that are liquid, they can be converted
to cash quickly or are used up within 12
months.
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Q4 What are the categories of assets?
Examples of current assets include:
Cash
Inventory
Accounts receivable
Prepayments
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Q4 What are the categories of assets?
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Current assets are expected to be consumed
or converted to cash within 12 months or
the within the businesss normal operating
cycle.
The operating cycle represents the time
between the acquisition of the assets (raw
materials etc.) and their ultimate realisation
in cash or cash equivalents.
La Trobe Business School
Q4 What are the categories of assets?
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Current assets are normally held as part of the
day-to-day trading activities of the business.
A business holds inventory, then the business
sells it for cash or on credit and business either
receives cash immediately (cash sales) or on
account within say 7 days or 30 days time (credit
sales), the cash is then used to buy more inventory
and the operating cycle continues. Figure 3.1 on
the next slide shows the circular (cyclical) nature
of current assets.

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Q4 What are the categories of assets?
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Q4 What are the categories of assets?
Non-current assets = longer-term assets,
remain assets for longer than 12 months.
Sometimes non-current assets are called
fixed assets or long-term assets.
Held for the purpose of generating wealth,
rather than for resale.

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Q4 What the categories of assets?
AASB 101 Presentation of Financial Statements
requires companies to classify assets according to
their nature or function. Classification can be on
either:
1. Current/non-current basis or
2. The basis on the order of liquidity (the timing of
receipt of cash).
Current/non-current predominates however some
companies use liquidity basis if it provides more
relevant and reliable information.
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Q4 What does the listing of the assets
tell us about the business?
Liquidity
It informs on how liquid the business is.
What is liquidity? Liquidity refers to the
ease with which assets can be converted
to cash in the normal course of business.
Is there enough liquid assets such as cash
and near cash equivalents available to
cover the short-term debts as they
become due?
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Q4 What does the listing of the assets
tell us about the business?
Liquidity
Liquidity is extremely important because
business failures occur when the business
cannot pay its debts when they become
due. Liquidity is a very obvious indicator
of the financial health (or illness) of a
business. Lack of liquidity means the
DEATH (bankruptcy) of the business.
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Q4 What does the listing of the assets
tell us about the business?
In the case of the business owner, if they do not have
enough cash or cash equivalents to pay their short-term
debt obligations they need to find a source of cash
really quickly such as an increase in bank overdraft or
bank loans or other alternative sources of financing. If
the business does not find the cash it needs in time the
business will fail.
Additionally, in Australia it is illegal for a business to
trade when it is technically insolvent (doesnt have
enough cash to pay its creditors). Business owners face
substantial penalties if their business continues to trade
when it is insolvent.


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Q4 What does the listing of the assets
tell us about the business?
In the case of the creditors, they want to know that the
debt that is owed to them will be paid in full and on
time. If there isnt sufficient cash, the creditor will
withdraw credit and/or supply to the business.
Sufficient levels of cash and near cash equivalents held
by a business are a reasonable indicator that the debt
will be paid in full and on time.


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Q4 What does the listing of the assets
tell us about the business?
The mix of assets held by the business
The relationship between current and non-current assets is
important. If a business has a too high percentage of their
total assets tied up in non-current assets they may be
vulnerable to financial failure, because converting non-
current assets to cash to meet short-term obligations is not
easy and cannot be completed very quickly.
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Assets
are defined as
Resources controlled by the business as a result of a past event
and from which future economic benefits are expected to flow
Examples of assets include cash, accounts receivable,
inventory, prepaid expenses, land, equipment, buildings, motor
vehicles, investments, notes receivable.
Concept
Map
Asset
definition
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Asset
Characteristics
are
Concept
Map Asset
recognition
1.
Expected to
have future
benefit
2.
Controlled
by the
business
3.
A past
transaction
or event has
occurred
4.
Reliably
measured in
monetary terms

All four asset characteristics must be present for an asset to
included on the statement of financial position
& & &
An asset is recognised
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Are classified
based on
Concept
Map Asset
classification
Assets
Real, Physical
Substance?
No
Intangible
Asset
Yes
Tangible
Asset
Conversion to
cash within 12
months?
No
Non-current
Asset
Yes
Current
Asset
Examples:
Equipment,
Land.
Examples:
Cash, Inventory
Examples:
Trademarks,
Patents.
Examples:
Inventory
Equipment,
Land
Must be classified as current/non-current on the statement
of financial position (balance sheet)
Only purchased
intangible assets
can appear on the
statement of
financial position
Tangible assets
can also be either
current or non-
current assets
Topic Intended Learning Outcome 1
At the end of this presentation and
completing your other BUS1AFB topic
tasks, you should be able to:
Understand and apply the criteria for defining
and recognising assets.

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La Trobe Business School