Financial Accounting for Decision Makers

Yes
No
Yes
Yes
No
No
No
Yes
The characteristics identified are discussed in the chapter.
Indicate which of the following items could appear as an asset on the statement of finan-
cial position of a business. Explain your reasoning in each case. 
1 £1,000 owed to the business by a credit customer who is unable to pay.
2 A patent, bought from an inventor, that gives the business the right to produce a new 
product. Production of the new product is expected to increase profits over the period 
during which the patent is held.
3 A recently hired new marketing director who is confidently expected to increase prof-
its by over 30 per cent during the next three years.
4 A recently purchased machine that will save the business £10,000 each year. It is 
already being used by the business but it has been acquired on credit and is not yet 
paid for.
Your answer should be along the following lines: 
1 Under normal circumstances, a business would expect a customer to pay the amount 
owed. Such an amount is therefore typically shown as an asset under the heading ‘ 
trade 
receivables
’ (or ‘debtors’). However, in this particular case, the customer is unable to 
pay. As a result, the item is not an economic resource and the £1,000 owing would not be 
regarded as an asset. Debts that are not paid are referred to as
bad debts
.
2 The patent would have all the characteristics identifi ed and would, therefore, be regarded 
as an asset.
 Activity 2.4 
M02 Atrill's Financial Accounting For Decis 51257.indd 40
18/03/2019 14:13

---

THE STATEMENT OF FINANCIAL POSITION 
41
The sorts of items that often appear as assets in the statement of financial position of a busi-
ness include:
■ 
property;
■ 
plant and equipment;
■ 
fixtures and fittings;
■ 
patents and trademarks;
■ 
trade receivables (debtors); and
■ 
investments outside the business.
3 The new marketing director would not be considered as an asset. One argument in sup-
port of this position is that the business does not have rights of control over the director. 
Nevertheless, it may have control over the services that the director provides. Even if 
these services become the focus of attention, however, it is usually impossible to mea-
sure them in monetary terms with any degree of certainty.
4 The machine has the characteristics identified and so would be considered an asset 
even though it is not yet paid for. Once the business has contracted to buy the machine, 
and has accepted it, ownership will pass even though payment is still outstanding. (The 
amount outstanding would be shown as a claim, as we shall see shortly.)
Can you think of two additional items that might appear as assets in the statement of 
financial position of a typical business?
You may be able to think of a number of other items. Two that we have met so far, because 
they were held by Paul’s wrapping paper business (in Example 2.1), are inventories and 
cash.
Activity 2.5
Note that an asset does not have to be a physical item – it may be a non-physical one that 
gives a right to potential benefits. Assets that have a physical substance and can be touched 
(such as inventories) are referred to as 
tangible assets
. Assets that have no physical sub-
stance but which, nevertheless, may provide future benefits (such as patents) are referred to 
as