What are ‘Long-Term Assets’
Long-term assets are the value of a company’s property, equipment and other capital assets, minus depreciation. This is reported on the balance sheet. Be aware that long-term assets are usually recorded at the price at which they were purchased and do not always reflect the current value of the asset.
BREAKING DOWN ‘Long-Term Assets’
There are three main financial statements available to investors. They are the income statement, cash flow statement and the balance sheet. The income statement provides an overview of sales and expenses; the cash flow statement provides an overview of the company’s sources and uses of cash; and the balance sheet provides a snapshot in time of the company’s assets, liabilities and shareholder equity. Indeed, the balance sheet equation is “assets equals liabilities plus shareholder’s equity” because a company can only fund the purchase of assets with capital from debt and shareholder’s equity.
One of the most important components of the balance sheet equation is long-term assets. These are assets that the company plans on holding for more than one year. Changes in long-term assets can be a sign of intense capital investment or liquidation; the former uses cash, the latter is a source of it.
There are two main distinctions between assets on the balance sheet : current and non-current. Current assets are categorized in a separate line item and show the value of assets that are expected to be used within the year. For example, the most common current asset for retail organizations is inventory. This is why long-term assets are also referred to as non-current assets by analysts and accountants.
Long-term Asset Types
Long-term assets can include long-term investments such as stocks and bonds or real estate. Capitalized “property, plant and equipment” are also included in long-term assets, except for the portion designated to be expensed or depreciated in the current year. Capitalized assets are long-term operating assets that are useful for more than one period. Firms do not have to deduct the entire cost of the asset from net income in the year it is purchased if it will give value for more than one year. This is due to an accounting convention called depreciation.
Depreciation is an accounting convention that allows companies to expense an estimate for the portion of long-term operating assets used in the current year. It is a non-cash expense that inflates net-income, but helps to match revenues with expenses in the period in which they are incurred. This includes land, buildings, machinery, vehicles, equipment and intangible assets, such as patents and trademarks. The goodwill acquired in a merger or acquisition is also considered an intangible long-term asset.