Question

1. Locate five terms that you consider to be associated with assets (what a business owns).

2. Define each term, and explain why it should be included as an asset in a business organization.

Answer 1

In a business asset is anything tangible or intangible that it owns or controls to produce value and positive economic value, thus represents value of ownership that can be converted into cash. The five terms that can be associated with assets are:

1) Toxic Assets: Toxic assets, also known as troubled assets, are those assets that have experienced a significant decline in it's value and thus there is no longer a functioning market and cannot be sold at a satisfactory price to the holder

However, these must be included in a business organization. Firstly these assets can create a liability and affect business ability to gain credit and maintain its own value. Moreover what is worthless today may have great value tomorrow, thus the value investor’s target has to find undervalued companies, companies that others underestimate or overlook.

2) Marketable Security: Marketable securities are securities/debts that are to be redeemed or sold within a year. Marketable securities can include government commercial paper, bonds and notes, and/or stock and bond investments in public corporations.

A business organization should include all of its assets including marketable securities because ccreditors /investors are interested in the marketable securities figure for determining what assets are liquid in case the business has solvency issues

3) Economic Life: Economic life refers to a time frame that a fixed asset provides value to the company.

It is important for a business organization to recognize because it enables to determine when it is worthwhile to invest in new equipment, thus can be replaced or renewed timely

4) Preferred Stock: Preferred stock, also known as preference shares, preferred shares, or simply preferred is a type of stock that holds a higher claim on its assets and earnings compared to common stock. Moreover also entitles the holder to a fixed dividend, whose payment takes priority in comparison to ordinary share dividends.

In a business-liquidation scenario or bankruptcy proceedings, the claims of preferred shareholders' holds precedence over the rights of common shareholders, thus business must include these.

5) Wasting Asset: When a business asset is utilized, it depreciates, eventually having no or little residual value. During the period of depreciation, the asset is termed as a "wasting asset."

A business must include wasting asset because the investors wants to be aware of the extent to which wasting assets may disappear, thus leaving the investment with no or little asset base. Moreover, company must invest in processes to ensure that its assets are recyclable, renewable, and sustainable