Basic accounting questions

[Alphathree33]

I have zero background in accounting and I'm muddling through a balance sheet right now.

Questions:

- I know Current Assets are Assets I can sell within a year. But what is the relationship between Current Assets and Assets? If I tell you that I have $10B in Assets and $4B in Current Assets, can I conclude that I have $10B assets in total, or $14B assets in total?

- Same question as above, but for liabilities.

- Can someone explain Capital Expenditures and Depreciation? My current understanding is:

I buy a $5000 computer. This shows up as -5,000.00 on my cash flow statement as a capital expenditure.

Every year it depreciates by $1000 (simplification.) ... So this shows up as a +1,000.00 item on my cash flow statement under "depreciation".

How am I getting cash from an asset depreciating? Aren't I double counting something here? I already claimed -5,000 when I bought the thing, and I'm slowly going to "get it all back" over 5 years. The net result is (apparently) that I didn't spend any money, but I clearly did. At the end, I have neither my original $5,000 nor an asset (computer) worth anything. So didn't I just lose $5,000 in total?

<confused> thanks.

 

[Pacemaker]

Ouch, calculus I can do accounting makes no sense to anyone but accountants.

 

[dbk]

On a balance sheet "current assets" are under the "Assets" as a subcategory-so it's inclusive.
Just go pull a balance sheet of any company.

Depreciation, as an expense, didn't involve any cash flow so you're "adding" it back into the income for the purposes of the cash flow statement.

 

[BoomerD]

Depreciation is just a means of spreading the cost of the computer out over a set number of periods instead of claiming the entire purchase price as a one-time expense. It makes for more accurate accounting and in many cases, is required by the IRS. (there are some provisions for expensing some things, but most need to be depreciated)

http://www.glossarist.com/glos.../accounting.asp?Page=2

http://www.accountingglossary.net/index.php

 

[JS80]

Originally posted by: Alphathree33
I have zero background in accounting and I'm muddling through a balance sheet right now.

Questions:

- I know Current Assets are Assets I can sell within a year. But what is the relationship between Current Assets and Assets? If I tell you that I have $10B in Assets and $4B in Current Assets, can I conclude that I have $10B assets in total, or $14B assets in total?

- Same question as above, but for liabilities.

- Can someone explain Capital Expenditures and Depreciation? My current understanding is:

I buy a $5000 computer. This shows up as -5,000.00 on my cash flow statement as a capital expenditure.

Every year it depreciates by $1000 (simplification.) ... So this shows up as a +1,000.00 item on my cash flow statement under "depreciation".

How am I getting cash from an asset depreciating? Aren't I double counting something here? I already claimed -5,000 when I bought the thing, and I'm slowly going to "get it all back" over 5 years. The net result is (apparently) that I didn't spend any money, but I clearly did. At the end, I have neither my original $5,000 nor an asset (computer) worth anything. So didn't I just lose $5,000 in total?

<confused> thanks.

current assets is a subtotal so i would assume $10b total.

You have to add back depr bc it hits net income, but you already accounted for the cash out in year1 capex.

 

[Caecus Veritas]

Asset = Liability + Equity

Asset = Current assets + fixed assets + other assets
Liabilities = current liabilities + long term liabilities

so, to your question - if you have total assets of $10B and current assets are $4B, you have $6B in other forms of assets.

current assets/liabilities are ones that are due or to be received within 12 months.

depreciation is a non-cash expense. you buy a $10B equipment. you don't take that expense straight to your income statement. rather, you record it on your balance sheet first - in assets, liabilities and equity. then, by whatever rule you're using (i.e. 15-year straight line), you expense portions of the cost of equipment every year on your income statement. your balance sheet would then reflect the correspondingly decreasing asset value every year as well.

as for your cash flow statement, i'm not sure why you would add back the depreciation amount. the initial investment of $5,000 should be subtracted. however, deprecation would not add $1,000 to your cash flow statement. perhaps you are mistaking the process in which you are determining the actual cash inflow of a business from the income statement?


Edited for below example:

Year 1 in January
Balance sheet = $5,000 in cash & nothing else
cash flow statement = $5,000 in cash
income statement = $0

-you immediately buy a $5,000 equipment in cash
balance sheet = $5,000 in fixed assets & nothing else
cash flow statement = $5,000 - $5,000 = $0
income statement = $0

Year 2 in January
lets say you did business for the past 12 months and made revenue of $10,000

Income Statement
$10,000 - COGS - Total operating expenses = net profit
balance sheet = net resulting cash + $4,000 (equip depreciated) / equity adjusted accordingly
cash flow statement = $0 (where you started) + net profit + any non-cash expenses (depreciation)

the important part is that NET PROFIT which adds to the cash flow statement IS INCLUSIVE of the non-cash expenses (to make a note, net profit should not be used in calculating your cash flow statement but used just for this example). therefore, you actually have more cash than net profit. therefore, non-cash expenses are added to net profit. i think the confusion may have come from timing issue for you.... not sure this helps..

 

[Epic Fail]

One minor technical note about current asset, current can be longer than 12 months if the business cycle is longer.

 

[sactoking]

Originally posted by: Alphathree33
I have zero background in accounting and I'm muddling through a balance sheet right now.

Questions:

- I know Current Assets are Assets I can sell within a year. But what is the relationship between Current Assets and Assets? If I tell you that I have $10B in Assets and $4B in Current Assets, can I conclude that I have $10B assets in total, or $14B assets in total?

- Same question as above, but for liabilities.

- Can someone explain Capital Expenditures and Depreciation? My current understanding is:

I buy a $5000 computer. This shows up as -5,000.00 on my cash flow statement as a capital expenditure.

Every year it depreciates by $1000 (simplification.) ... So this shows up as a +1,000.00 item on my cash flow statement under "depreciation".

How am I getting cash from an asset depreciating? Aren't I double counting something here? I already claimed -5,000 when I bought the thing, and I'm slowly going to "get it all back" over 5 years. The net result is (apparently) that I didn't spend any money, but I clearly did. At the end, I have neither my original $5,000 nor an asset (computer) worth anything. So didn't I just lose $5,000 in total?

<confused> thanks.

In general:

Current assets are those assets that you anticipate converting to cash within 1 year or have near-cash liquidity.
Current liabilities are those liabilities that you intend to pay within 1 year or that have near-cash liquidity (i.e., they can be called at any time)

Current assets and liabilities are SUBSETS of assets and liabilities. If the Balance Sheet lists $4bn in Current Assets and $10bn in Total Assets, the $10bn number includes the $4bn.

Current Assets (CA) and Current Liabilities (CL) are important because they reflect a company's ability to meet all of its immediate obligations. CA - CL = Working Capital. If working capital is positive that means that in a pinch, a company could bring in all of the short-term money owed to it and be able to pay all of its short-term bills. A negative working capital is a sign of trouble. If the company's debts are all called, they won't be able to pay them and could be forced into involuntary bankruptcy.

Capital Expenditures and Depreciation:

When you buy a piece of Property, Plant, or Equipment (PPE) that purchase is NOT an operating activity, it is an investing activity. Since it's not an operating activity, it does NOT show up on your Income Statement (Profit and Loss). It shows up as an Investing Activity on the Statement of Cash Flows.

One of the primary precepts of Accrual accounting is matching revenues and expenses to the periods in which they occur.

Technically, your $5000 computer example isn't real good, since a computer is likely to be expensed as 'Office Equipment' upon purchase. Instead let's say that you bought a truck for $5000, you expect to use it for 5 years, and at the end of the 5 years it will have a resale value of $0.

In that example, the annual (straight-line) depreciation would be $1000 [($5000 - $0)/5]. Depreciation is an EXPENSE used to approximate the amount an asset is 'used up' in a given period. In other words, the asset worth $5000 is used up in 5 years, so you use about $1000 per year of the truck.

Each year, when you prepare your Income Statement, the Depreciation Expense of $1000 is recorded as a reflection of how much of that $5000 you used that year. That LOWERS your income by $1000 (and also lowers your taxable income). Depreciation Expense is then zero'ed out and transferred to the Accumulated Depreciation account, which is a 'contra-asset'. Accumulated Depreciation is posted to the balance sheet to lower the book value of the truck from $5000 (what you paid) to $4000 ($5000 - $1000, or the amount its worth after you used it for a year).

I think the main confusion is that you're thinking depreciation is ADDED back somewhere when it's actually SUBTRACTED (from Income every year on the Income Statement and from Book Value of the asset on the Balance Sheet).