Corporate Finance: Calculating Assets
Part of the Corporate Finance For Dummies Cheat Sheet
Everything that makes up a corporation and everything a corporation owns, including the building, equipment, office supplies, brand value, research, land, trademarks, and everything else, are considered assets. Generally speaking, when you start a corporation, you start off with cash, which you then use to purchase other assets.
The total value of assets held by a company is equal to the total liabilities and total equity held by the company. Here is the most fundamental equation in corporate finance:
Assets = Liabilities + Equity
Because the total amount of debt a company incurs goes into purchasing equipment and supplies, increasing debt through loans increases a company’s liabilities and total assets. As an owner contributes his own funding to the company’s usage, the total amount of company equity increases along with the assets.
Unlike liabilities, equity represents ownership in the company. So if a company owns $100,000 in assets and $50,000 was funded by loans, then the owner still holds claim over $50,000 in assets, even if the company goes out of business, requiring the owner to give the other $50,000 in assets back to the bank. For corporations, the equity funding varies a bit, however, because the owners of a corporation are the stockholders. The equity funding of corporations comes from the initial sale of stock, which exchanges shares of ownership for cash to be used in the company.