MODULE I – FINANCIAL ASSETS

MODULE I – FINANCIAL ASSETS                                                                                                

For an economy to operate effectively, consumers and businesses need a common medium of exchange and mechanisms to encourage some people to save, others to borrow and others to invest. In any modern economy, these needs are met with financial assets such as money, stocks and bonds.

1.1 Assets

Assets are commonly known as anything with a value that represent economic resources or ownership that can be converted into something of value such as cash.

1.2 Tangible and Intangible Assets

The best way to differentiate between tangible and intangible assets is to understand the word meanings of the two words ‘tangible’ and ‘intangible’. 

The word ‘tangible’ means something that can be felt with the sense of touch. Assets which have a physical existence and can be touched and felt are called ‘tangible assets’. The main difference between tangible and intangible assets is where one can be touched and felt the other only exists on paper. A tangible asset is an asset that has a physical form. Tangible assets include both fixed assets, such as machinery, buildings and land, and current assets, such as inventory.

Examples of  tangible include: Land, Vehicles, Equipment, Machinery, Furniture, Inventory, Securities like stocks, bonds, and cash.

There are two types of tangible assets:

Current assets include items such as cash, inventory, and marketable securities. These items are typically used within a year and, thus, can be more readily sold to raise cash for emergencies.

Fixed assets are noncurrent assets which a company uses in its business operations for more than a year. They are recorded on the balance sheet as Property, Plant, and Equipment (PP&E), and include assets such as trucks, machinery, office furniture, buildings, etc. The money that a company generates using tangible assets is recorded on the income statement as revenue. Fixed assets are needed to run the business continually.

The word ‘intangible’ means something that cannot be felt with the sense of touch. They do not have a physical existence and cannot be touched or felt. Intangible assets are typically nonphysical assets used over the long-term. Intangible assets are often intellectual assets, and as a result, it's difficult to assign a value to them because of the uncertainty of the future benefits.

Intangible assets include intellectual property (patents, copyrights and trademarks). Other examples of such assets include goodwill, patent, copyright, trademark, company’s brand name, franchises etc. Note that the life of an intangible asset can vary. For example, ‘patents’ have a definite life because they come with an expiration date – in most cases 20 years.  But ‘brand names’ have an indefinite life because they can last for the entire life of the company.

Difference between Tangible and Intangible Assets

Tangible Assets	Intangible Asset
1. They have a physical existence.	1. They don’t have a physical existence.
2. Tangible assets are depreciated.	2. Intangible assets are amortized.
3. Are generally much easier to liquidate due to their physical presence.	3. Are not that easy to liquidate and sell in the market.
4. The cost can be easily determined or evaluated.	4. The cost is much harder to determine for Intangible assets.
5. Examples: vehicle, plant & machinery, etc.	5. Examples: Software, logo, patent, etc.

For further information, please see the following website and also watch the video in the page.
https://www.investopedia.com/terms/f/financialasset.asp

For further understanding, watch the following video