Getting Started: The Balance Sheet

The Balance Sheet: Assets

Back to the real world and the assets section of the balance sheet: Some common assets you'll likely see in this section are cash, accounts receivable, inventory, property, plant and equipment and goodwill. Some items, such as cash, are self-explanatory. Other items such as accounts receivable aren't.

Accounts receivable represents liabilities owed to the company in the form of credit sales to customers. Because they're owed to us, they're assets in our eyes. Property, plant and equipment (PPE) is the account used to value a company's facilities. If you own stock in Apple AAPL, then its manufacturing facilities, corporate campus and retail stores would typically all be included under PPE.

Assets are classified as either current or noncurrent. Current assets are readily convertible to cash or will be used up in the course of one business cycle (one year for most companies). Noncurrent assets, such as land, are those that are going to stay on our balance sheet a little bit longer. These classifications hold true for liabilities as well.

But can you ever have too many assets? Possibly. Remember that every asset has to be paid for with either a liability or stockholders' equity. If a company is buying superfluous assets with massive debt or stock issues that devalue the holdings of current investors, it's probably best to steer clear of that company.

Additionally, while most assets seem like they're a good thing, others aren't necessarily so. Since you've got to have your product to sell to customers, having inventory is necessary. But while inventory is an asset (since it has definite financial value), stagnant inventory can accrue overwhelming carrying costs and devalue as it becomes obsolete. Something to definitely watch out for: low inventory turnover, which is basically how long it takes for an item to sell after it enters the inventory account.