Assets

Assets are things of value owned, or in some cases controlled, by a company. Assets consist of those items that make up the available resources of the company. Assets are listed in the order of their liquidity, that is, the ease with which they can be converted into cash. In addition to cash, assets that are expected to be converted into cash in the ordinary course of business within one year are classified as current assets.

Current assets are the primary consideration in credit work because it is generally from these current assets that a customer pays its bills. In other words, current assets are converted into cash, and that cash is used to pay current liabilities, including debts owned to trade creditors.

The current asset that credit professionals are most familiar with is accounts receivable. Accounts receivable are funds owed to the business by its customers. Generally, accounts receivable are listed on a balance sheet at invoice minus a reserve for discounts and bad debts.

Inventory (sometimes broken down into raw materials, work in process, and finished goods inventory) is among the least liquid of the current assets. In order for inventory to be converted into cash, it typically must be converted from raw materials to finished goods inventory, made available for sale, and sold and in the process converted into an accounts receivable. The accounts receivable is collected from the buyer (based on the seller's terms of sale) and only at this point and after each of these steps is the process of converting inventory into cash completed.

As a credit analyst you must always consider the possibility that the a customer that you are selling to already or considering for open account terms will file for bankruptcy protection or fail in some other way. An analysis of the company's assets, including both current assets and fixed assets is the first step in the process of trying to determine how much might be available to satisfy the debts owed to unsecured trade creditors in the event the customer fails.

Cash, of course, has 100 percent liquidation value, but accounts receivable is usually fairly difficult to collect by a customer that has failed, filed bankruptcy, or gone out of business. When considering the liquidation value of a debtor's accounts receivable, creditors generally assume the debtor will collect no more than 80 cents on the dollar on their accounts receivable.

The value of inventory would be reduced considerably in liquidation. As a rule of thumb, creditors should assume that debtors will receive only 50% of the stated value of inventory in a liquidation. Even this figure could be a grossly inflated estimate. It is difficult to guage the liquidation value of a company's non-current assets which would include property, plant and equipment. This is because of the way non-current assets are listed on a company's balance sheet. Under the accounting rules that most U.S. companies follow (called Generally Accepted Accounting Principles), non-currents assets (other than land) are carried at their acquisition cost minus accumulated depreciation. The value of non-current assets may have very little in common with the value listed on the balance sheet.

It may seem obvious, but this point must be stated clearly: the value of a non-current asset is what someone is willing to pay for it -- not the value listed on the balance sheet and the "market value" of a company's non-current assets is usually very different from their book value. This makes any attempt by an outsider such as a trade creditor to estimate the liquidation value of the assets of a company a difficult and inexact process.

Following fixed assets are such items as prepaid expenses (such as insurance premiums paid in advance), miscellaneous assets (such as receivables from officers or employees), and intangible assets (such as research or organization expenses deferred to future operations). In the event of liquidation the fixed assets would have some value, but most prepaid expenses and intangible assets would probably be worth nothing at all. However, there exceptions. In some cases, intangible assets are of significant value. For example, a tradename such as Coca-Cola ® obviously has a substantial value to the Coca-Cola Bottling Company and would have a significant value int he extremely unlikely event that this corporation failed and the assets of the corporation were sold in a liquidation process.