Company
Definition of Company
A company can be defined as the set of coordinated production factors (workforce, raw materials and technology), marketing (price, product, promotion and distribution) and financing (investment and financing) whose propose is producing (manufacturing a product or service) with the objective of creating value by means of efficiency.
The main objective of a company is creating or maximizing its value.
All merger or acquisitions are related to creating value. A company or person are going to be interested in buying a company if, with it, it will be possible to produce a value higher than it price.
Definition of Company
Under a financial point of view a company is a succession of investing and financing projects along the time.
Investment and financing
Both Investment and Financing are included in financial statements of the company, specifically in balance.
Example of a balance sheet
Balance
Investment is classified considering its liquidity or capability of turn into cash:
- Current asset (short term – less than 1 year).
- No current asset (long term – more than 1 year).
Financing is classified considering its demandability or obligation of payment.
- Equity.
- Current liability (short term – less than 1 year)..
- Non current liability (long term – more than 1 year).
Definition of Asset
Any resource that a company owned, which has present or future economic value which can be measured and expressed in monetary unit is an asset.
Examples: cash, investments, inventory, suppliers, land, buildings, equipment, vehicles…
No current asset
No current assets are long term assets, which could be classified in: Material, Intangible or Financial.
Current asset
Current assets are short term assets, which could be classified in: Inventories, Trade and other receivables, Financial investments, Cash or cash equivalents.
Example.- Organize the following assets in Material, Intangible or Financial if they are non current assets:
Bonds, software, finished good, equipment, vehicles, patents, obligations, buildings, licenses, cash, lands, promissory notes, shares, inventory, technical installations, trademarks, derivatives and raw materials.
Solution.-
| Material | Intangible | Financial |
| Equipment | Software | Bonds |
| Vehicles | Patents | Obligations |
| Technical installations | Licenses | Promissory notes |
| Lands | Trademarks | Shares |
| Buildings | Derivatives |
Finished good, cash, inventory and raw materials are current assets.
Example.- Organize the following assets in Inventories, Trade and other receivables, Financial investments, Cash or cash equivalents if they are current asset:
Goods for resale, Trade receivables, raw materials, equity instruments, supplies, cash, software, work in progress, finished goods, machinery, debt securities.
Solution.-
| Inventories | Trade and other receivables | Financial investments | Cash or cash equivalents |
| Good for resale | Trade receivables | Equity instruments | Cash |
| Raw materials | Debt securities | ||
| Supplies | |||
| Work in progress | |||
| Finished goods |
Software and machinery are non current assets.
Depreciation and capital loss
Depreciation
Any irreversible loss of value in non current assets is considered depreciation.
Depreciation can be defined as an accounting methodology to consider the cost of a non current assets over its useful life.
Long term assets are depreciated for both, tax and accounting purposes.
Current assets are not depreciated.
Capital loss
Reversible loss of value in both, current or non current assets is considered capital loss.
Example.- Buildings values
Liabilities and Equities
Working capital
For the company to be able to afford the daily payments, current asset should be bigger than current liability.
Current asset > Current liability
The working capital is the different between the current asset and the current liability and it is a measure of the capability of a company to continue with the normal activities it does in the short term.
Working capital = Current asset – Current liability
The working capital can be also defined as the part of current asset which is not financed by current liabilities, because it will be financed by equity or non current liabilities.
Summary
Financing fundamental Theorem
Company must funded to be able to invest, and with the investment returns pay the financing back.
Investment (asset) and financing (equity and liability) are also related along the time.
Financing fundamental Theorem
Company value increase when the investment profitability is bigger than the liability and equity cost (cost of capital).