What is Finance? Part 2

 

Assets can be classified into two

types current asset and fixed asset so

the current assets are the assets having

shorter lives usually less than one year

for example cash accounts receivables

and inventories the other type of asset

is the fixed assets which has longer

lives for example equipment, machineries,

building patterns

these acids normally have life more than

one year now if we focus on the right

hand side the first thing is current

liabilities which contain the

liabilities of the firm that must be

repaid within one year period for

example accounts payable among the long

term depths we can give example like

corporate bonds or long term borrowing

from the banks okay so these are the

liabilities that does not have to be

repaid within one year and the owner's

equity are essentially the claims of the

owners okay maybe it is their investment

or maybe the profit generated from their

investments for example common stock or

retained earnings so these are the

components of the balance sheet and. These components can also be related to

different areas of finance for example

the fixed assets are related to capital

budgeting because when the firm decide

in which assets which long-term assets

that form should invest they actually

determine the fixed asset component of

the business organization so this is

related to capital budgeting.

 Now the long-term depth and owner's equity these

part of the balance sheet is related to

capital structure decision because if

the firm decide how much to borrow and

how much to get from the owner okay that

is essentially the capital structure of

the firm now the remaining portion

current assets and current liabilities

,both of these two have shorter

lives less than one year one year or

less,  so the management of current

assets and current liabilities this is

related to the working capital

management area of business finance.