assets section includes three main categories — investments, property, plant, and equipment (PPE), and depreciation. I describe each of these in more detail in the following sections.
Investments
Long-term investments typically include equities and debt investments held by the company for financial gain, for gaining control over another company, or in funds such as pensions. It can also include facilities or equipment intended for lease or rent. In any case, all the investments in this section are meant to be held for more than one year.
Note: Sometimes a company lists its bond investments as notes receivables, which are reported sort of like accounts receivables, except with the expectations of receiving payments in the long term.
Property, plant, and equipment
The property, plant, and equipment (PPE) category includes nearly every major physical asset a company has that it will use for more than one year. Buildings, machinery, land, major furniture, computer equipment, company vehicles, and even construction-in-progress projects all qualify as PPE. Basically, if you can touch it and plan to use it for more than a single year, it contributes to the value of PPE.
Depreciation
The long-term physical assets included in PPE don’t last forever. With age and usage, every long-term physical asset is subject to depreciation, or a decrease in value. Different companies measure depreciation in different ways (some of which I discuss later in this section), but regardless of the manner in which a company measures depreciation, the total shows up on the balance sheet as a subtraction from the total value of PPE. It looks something like this:
A company may choose to leave out the gross PPE line because it doesn’t contribute anything to the value of the total assets (and because you can calculate it easily, given the other information listed).
What follows are two of the most common methods for calculating depreciation.
Straight-line and unit-of-production depreciation
The easiest type of depreciation to use is called straight-line depreciation. Straight-line depreciation is cumulative, meaning that if you report a value in depreciation for a piece of equipment one year, that same amount gets added to the next year’s depreciation, and so on, until you get rid of the equipment or its value drops to 0.For example, if you buy a piece of equipment for $100 and each year it has a depreciation of $25, then you’d report $25 of accumulated depreciation the first year and $50 of accumulated depreciation the next year, while PPE value would go from $100 the first year to $50 the next.
A similar type of depreciation, called unit-of-production depreciation, replaces years of usage with an estimated total number of units that the equipment can produce over its lifetime. You calculate the depreciation each year by using the number of units produced that year.
SUM OF YEARS DEPRECIATION
The sum of years method for calculating depreciation applies a greater value loss at the start of the equipment’s life and slowly decreases the value loss each year. This method allows companies to take into account the marginally decreasing loss of value that most purchases go through.
To see what I mean, imagine that you’re buying a new car. Unless you get into an accident or otherwise damage the vehicle, the car itself will never lose as much value during its lifetime as it does in the first year. By the time the car is 10 years old, it will have lost most of its value, but it won’t be losing its value as quickly each year.
So if you purchase a piece of equipment for $100,000 and it’s supposed to last for five years with a salvage value of $10,000, then the first year’s depreciation would look like this:
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.
