Inventories are items held for sale or used in the manufacture of products that will be sold. A retail company lists only one type of inventory on the balance sheet: merchandise inventories purchased for resale to the public. A manufacturing firm, in contrast, would carry three different types of inventories: raw material or supplies, work-in-process, and finished goods. For most firms, inventories are the firm’s major revenue producer. Exceptions would be service-oriented companies which carry little or no inventory.
Certain expenses, such as insurance, rent, property taxes, and utilities, are sometimes paid in advance. They are included in current assets if they will expire within one year or one operating cycle, whichever is longer. Generally, prepayments are not material to the balance sheet as a whole.
The category of property, plant and equipment encompasses a company’s fixed assets （also called tangible, long-lived capital assets） – those assets not used up in the ebb and flow of annual business operations. These assets produce economic benefits for more than one year, and they are considered tangible because they have a physical substance. Fixed assets other than land （which has a theoretically unlimited life span） are depreciated over the period of time they benefit the firm. The process of depreciation is a method of allocating the cost of long-lived assets. The original cost, less any estimated residual value at the end of the asset’s life, is spread over the expected life of the asset. Cost is also considered to encompass any expenditures made to ready the asset for operating use. On any balance sheet date property, plant and equipment is shown at book value, which is the difference between original cost and any accumulated depreciation to date.
Other assets on a firm’s balance sheet can include a multitude of additional noncurrent items such as property held for sale, start-up costs in connection with a new business, the cash surrender value of life insurance policies, and long-term advance payments.
Liabilities represent claims against assets, and current liabilities are those that must be satisfied in one year or one operating cycle, whichever is longer. Current liabilities include accounts and notes payable, the current portion of long-term debt, accrued liabilities and deferred taxes.
Accounts payable are short-term obligations that arise from credit extended by suppliers for the purchase of goods and services. The ongoing process of operating a business results in the spontaneous generation of accounts payable, which increase and decrease depending on the credit policies available to the firm from its suppliers, economic conditions, and the cyclical nature of the firm’s own business operation.
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