Question

Part 1 – Current and long-term investments: From the perspective of a potential long-term investor, describe what you might look for when examining the assets of a corporation. Include in your answer an understanding of how short-term assets and long-term operating assets are different and what role they each play in a company’s performance.

Part 2 - What might the different asset balances indicate to you as they change from year-to-year?

Part 3 - What relationships would you look for between current assets and long-term assets? If it’s helpful, apply your answer to a particular company or industry (but be sure to indicate what company or industry you are using.) Be sure to include at least two different current assets in your answer and at least two different long-term assets.

Part 4 – What is a contra-asset?

Part 5 - Give two examples of contra-assets.

Part 6 - Why are contra-assets used?

Part 7 - What kind of transaction causes an increase to contra-asset accounts. Give an example of a transaction that would decrease a contra-asset account.

Part 8 - What might indicate to the readers of the financial statements if a contra-asset account has a “negative” balance?

Answer 1

1. The assets of the firm can be analysed as current assets and long term assts. The current assets are the assets which are generated because of the operations of the firm. For example: Accounts receivable, inventory, etc. The long term assets are the assets which invested by the firm for long term to generate revenue. Current assets are held for less than one year and fixed assets are held for greater than one year. Increase in current assets leads to cash outflow and decrease in current assets leads to cash inflow

2. The movement in current assets indicate the change in working capital. Higher current assets needs higher working capital and lower current assts needs lower working capital. The increase in fixed assets indicates asset purchase and decrease in fixed assets indicates depreciation and sale of assets if sold during the year

3. The current assets are a measure of liquidity of the firm. For example, day’s sales receivable indicates the number of days the receivables is kept outstanding. Inventory days on hand represent the number of days inventory is carried on by firm. Both are part of operating cycle and indicate the working capital needed by the firm. The long term assets like buildings, equipment, machinery are purchased with a view to generate operating revenue of the firm. The investment for theses assets are funded by cash of the firm a major portion of which generates from liquidity of the current assets.

4. A contra asset is an account which is used to reduce the balance of the related asset in the balance sheet by netting of the two.

5. Examples of contra-assets

· Provison for doubtful debts

· Accumulated depreciation

6. The contra assets are used to keep separate identity of the transactions since it is material in nature and indicates how the Provison or reduction in value is accounted for

7. The kind of transactions that cause increase to contra-asset account are increase in Provison and expenses provided during the year.

Example of transaction that causes decrease in a contra-asset account

· Write off of bad debts

· Sale of assets

8. The negative balance in contra asset account indicates the excess usage of provision kept for the asset. It should be written off to income statement. For example debit balance in Provison for doubtful debts indicates excess write off of the bad debts during the year.