Part 2 · The balance sheet: a company's list of belongings · Lesson 7
Assets: cash, inventory, and the factory
Not all assets are the same kind of money. Some turn into cash quickly, some are used for a long time, and some are dangerous if they grow too fast.
QToday's question
KRW 1 billion in cash, KRW 1 billion in unpaid bills, and KRW 1 billion in inventory are all 'KRW 1 billion of assets'. But are they really worth the same?
On the books, all three are KRW 1 billion. But cash can be spent today, unpaid bills must be paid by customers, and inventory becomes money only once it is sold. When reading assets, what matters as much as the amount is 'how fast and how surely it turns into cash'.
MAPLearning map for this lesson
We build it up in three steps. At the end of each step, a 'Quick check' lets you test your understanding before moving on.
In Lesson 6 we saw that assets = liabilities + equity, and that assets are split into current and non-current using a one-year standard. In Lesson 1 we saw that when you sell on credit, profit is recorded but the cash hasn't come in yet. In this lesson we open up Robin Bakery's KRW 10 billion of assets line by line. Today's stage is the upper half of the balance sheet in the annual report's III. Financial Matters (Lesson 5).
- STEP 1 · Basic conceptsAssets that quickly turn into cash
Explain what cash, , and are, and the order in which they turn into cash.
- STEP 2 · Understanding the principlesLong-lived assets and depreciation
Understand how becomes an expense each year through , and what are.
- STEP 3 · Real-world applicationWhen receivables and inventory grow too fast
Compare sales growth with the growth of trade receivables and inventories, and calculate to screen out warning signs.
STEP 1Assets that quickly turn into cash
We read the asset side from the top. A balance sheet usually lists items in order, starting with those closest to cash.
Wallet, credit ledger, warehouse
Picture a bakery owner's belongings: the money in the register and bank account, the money still owed by the café customers they have delivered to, and the flour in the warehouse and bread on the shelves. The current assets on a balance sheet are made up of exactly these three things. Money you can spend right away is , sold-but-not-yet-paid amounts are , and goods held for sale are . The fictional Robin Bakery's current assets of KRW 3 billion split into KRW 800 million in cash, KRW 1 billion in trade receivables, KRW 900 million in inventory, and KRW 300 million in other items.
Even when all three are the same 'KRW billions', their nature differs. Cash is already money. Trade receivables become money only when customers pay, so if a customer goes under, part of it may not be collected. That's why a company subtracts in advance the amount it expects not to collect and records it as an 'allowance for doubtful accounts'. Inventory must first be sold, and if sold on credit, it must then be collected before it becomes cash. If it doesn't sell, such as last season's clothes or bread past its expiry date, its value can be written down.
Is more cash always better?
A company with plenty of cash has the strength to endure a downturn. But that doesn't mean more is always better. Cash piled up with nowhere to go earns only deposit interest, so shareholders' share may grow more slowly than if it were invested in equipment or returned to shareholders. That's why investors look at 'what is this cash planned for' as much as the amount of cash. On the other hand, if cash is too low, money can run short on payday or when borrowings come due. Robin Bakery's (fictional) cash of KRW 800 million is about 40% of the KRW 2 billion of current liabilities due within a year, and trade receivables of KRW 1 billion due in soon back it up. How to read this relationship in numbers is covered in the current ratio and quick ratio in Lesson 10.
Quick checkRobin Bakery sold KRW 100 million worth of bread on credit to a cafe customer. Which asset goes down and which goes up?
STEP 2Long-lived assets and depreciation
Now the lower part of the asset side: assets that stay with the company for more than a year. For a bakery, this is the biggest chunk.
An oven isn't used up in one year
KRW 6 billion of Robin Bakery's KRW 7 billion in non-current assets is : visible equipment used for many years, such as ovens, store interiors, and delivery vehicles. Say it buys one oven for KRW 100 million and uses it for 10 years (hypothetical). If the full KRW 100 million were expensed in the year of purchase, only that year would show a loss, and the other nine years would look like free use of the oven. So accounting spreads the KRW 100 million over 10 years and turns KRW 10 million into an expense each year. This is . The oven's book value falls year by year: KRW 100 million → KRW 90 million → KRW 80 million.
Depreciation expense has one important feature. It is an expense on the income statement, but no cash leaves in that year, because the cash already went out when the oven was bought. This is one reason why, in Lesson 1, Robin Bakery's cash flow from operating activities (KRW 1.8 billion) was larger than its net income (KRW 1.2 billion). Conversely, since worn-out equipment eventually has to be replaced, a company that must keep investing in equipment (CAPEX in Part 4) keeps needing cash.
Assets you can't see
such as trademarks, patents, and software have no physical form but earn money. The fictional Robin Bakery recorded KRW 400 million for its brand trademark and ordering app combined. However, most of the brand value a company builds itself is not recorded on the books. The amount paid above book value when acquiring another company (goodwill) is recorded as an intangible asset, and if the acquired company's results worsen, it may be written down sharply and booked as a loss.
See it as a picture: speed of turning into cash
Press 'Start' and a dot runs along to show how long it takes each asset to reach cash. Tap a row to see the explanation.
Based on Robin Bakery (fictional). The collection period is calculated as trade receivables KRW 1 billion ÷ revenue KRW 12 billion × 365 days ≈ 30 days, and the inventory holding period as inventory KRW 900 million ÷ cost of sales KRW 7.2 billion × 365 days ≈ 46 days. The horizontal axis is compressed for readability.
Common misconceptions
- "If you have lots of assets, you can always raise money?"
- No. Property, plant and equipment turn into cash only if you sell the factory, and if you sell it you can't run the business. What you can use in an emergency is mostly cash and trade receivables that will soon be collected.
- "A large depreciation expense means the company spent a lot of money?"
- The money didn't go out that year. It is the cost of equipment bought in the past, spread over time. That's why in Part 4 we add depreciation back and look at it again on a cash basis.
- "More inventory means more goods to sell, which is good?"
- If sales are growing and the inventory was built up in advance, that's fine. But if inventory is piling up because it isn't selling, cash gets tied up and the inventory may have to be written down later. You need to look at it together with sales.
Quick checkA company buys a delivery truck for KRW 50 million and plans to use it for 5 years (hypothetical). How much is the annual depreciation expense, and what is the book value after 3 years?
STEP 3When receivables and inventory grow too fast
Growing assets are usually good news. But if the assets that grew are receivables and inventory, take a second look.
Check that they move in step with sales
As a business grows, its receivables and inventory naturally grow too. If sales rise 10%, trade receivables and inventory usually rise by around 10% as well. The problem is when sales grow 10% but receivables grow 50% or 60%. That can mean "it was booked as a sale, but the cash isn't coming in." The company may have forced sales by giving customers longer payment terms, or it may have more customers that are hard to collect from. The same goes for inventory: if it piles up much faster than sales, it can be a sign that the goods being made aren't selling.
A way to see this as a single number is . Divide trade receivables by sales and multiply by 365 to get the average number of days it takes to collect payment after a sale. The fictional Robin Bakery's figure is KRW 1 billion ÷ KRW 12 billion × 365 ≈ 30 days. If this number gets longer every year, it means the company's ability to collect from customers is weakening. The 'profitable bankruptcy' you will learn about in Part 4 usually starts here.
See it in a chart: Robin Bakery vs Dark Cloud Electronics
Switch companies. Both companies' sales grew about 10% a year. How did their receivables and inventory move?
Both are hypothetical companies for teaching purposes. Sales, trade receivables and inventory over 3 years: Robin Bakery KRW 10→11→12 billion, 0.85→0.92→1.0 billion, 0.76→0.83→0.9 billion / Dark Cloud Electronics KRW 20→22→24 billion, 3.0→4.8→7.5 billion, 2.5→3.8→5.5 billion. Growth rates are year over year.
Find it yourself on DART
In the consolidated balance sheet we opened in Lesson 6, the lines right below total current assets are the items you learned today. We look at the same screen again as a guide example.
1234- 1Cash and cash equivalents: KRW 53,705,579 million (about KRW 53.7 trillion).
- 2Trade receivables: KRW 43,623,073 million (about KRW 43.6 trillion). The "(Note 4, 5, 7, 28)" next to the name are note numbers. Details such as the allowance for doubtful accounts are in those notes.
- 3Inventories: KRW 51,754,865 million (about KRW 51.8 trillion). Compare with the 55th and 54th term figures on the right to see how much it grew.
- 4Property, plant and equipment: KRW 205,945,209 million (about KRW 205.9 trillion). It sits under non-current assets; scroll down a little and intangible assets appear as well.
Screen: DART, Samsung Electronics annual report filed 2025.03.11 (56th term, as of 2024.12.31), consolidated balance sheet, in millions of won. This is a guide example, not an investment recommendation.
How to use it in investing
When reading the asset section, put the three years of figures side by side and compare them with sales on the income statement. If trade receivables or inventories have grown unusually fast compared with sales, look in the notes for the allowance for doubtful accounts and inventory valuation. Also remember that the normal range differs by industry. Businesses with lots of cash sales, like a bakery, have short collection periods, while industries that run large contracts over a long time, such as shipbuilding and construction, can have long ones. So the basic approach is to compare against companies in the same industry and against the same company's own past (Part 5).
| If you see this number | Where to check |
|---|---|
| Trade receivables growth ≫ sales growth | Trade receivables and allowance for doubtful accounts in the notes; operating cash flow in Part 4 |
| Inventory growth ≫ sales growth | Inventory valuation in the notes; the demand discussion in II. Business Overview |
| Intangible assets (goodwill) are very large compared with | Performance of acquired companies, whether there is an impairment loss |
It isn't always so. A big delivery bunched up at year-end, or building inventory ahead of a new factory opening, can make the numbers spike for just one year. Look at the multi-year trend and the company's own explanation (IV. Management Discussion and Analysis) together, not a single year's figure.
Quick checkA company has sales of KRW 36.5 billion and trade receivables of KRW 7.3 billion. How many days is its days sales outstanding?
✓What we learned today
- What matters for an asset is how fast and how surely it turns into cash. The balance sheet generally lists items starting from those closest to cash.
- Trade receivables are amounts you've sold but not yet collected, and inventories are goods held for sale. Both must be sold and collected before they become cash.
- Property, plant and equipment is equipment used for a long time, and depreciation is spreading its cost over the years of use as an expense. Depreciation is an expense that doesn't send cash out.
- If receivables and inventory grow much faster than sales, it can be a sign of "sold but not paid, or made but not selling."
- Days sales outstanding = trade receivables ÷ sales × 365. Robin Bakery (hypothetical) is about 30 days and Dark Cloud Electronics (hypothetical) about 114 days.
We move to the right side of assets, the side that supplied the money. The next lesson covers liabilities. You'll tell apart debt that charges interest, debt that doesn't, and even debt that signals a business is doing well.
Quiz5-question quiz
Pick an answer and it's graded right away with an explanation.
Q1. Which of the following assets means money from a sale that hasn't yet been received?
Trade receivables are money owed for goods or services already sold. Advances received are the reverse, money received in advance, so they are a liability.
Q2. Which lists Robin Bakery's assets in order of how fast they turn into cash, fastest first?
Cash is already money; receivables only need to be collected; inventory must be sold and then collected; and PP&E is long-lived equipment, so it is the slowest.
Q3. If a KRW 100 million oven is used for 10 years (hypothetical), which statement about depreciation is correct?
Depreciation spreads the cost of equipment over the years of use as an expense. The cash already went out at the time of purchase, so each year's depreciation is a non-cash expense.
Q4. Sales rose 10% but trade receivables rose 60%. What should you suspect first?
If receivables grow much faster than sales, sales may be booked but cash isn't coming in. Check the notes and operating cash flow together.
Q5. Robin Bakery (hypothetical; sales KRW 12 billion, trade receivables KRW 1 billion). About how many days is its days sales outstanding?
KRW 1 billion ÷ KRW 12 billion × 365 days ≈ 30 days. Dark Cloud Electronics (hypothetical) was KRW 7.5 billion ÷ KRW 24 billion × 365 ≈ 114 days.
NextTerms · Next lesson · Related tools
Everything a company owns (cash, receivables, inventory, equipment and so on). It is always true that assets = liabilities + equity.
Current assetsCurrent assetsAssets expected to turn into cash within about a year (or the normal operating cycle). They include cash, trade receivables and inventories.
Non-current assetsNon-current assetsAssets that stay with the company for more than a year. They include property, plant and equipment, intangible assets and long-term investments.
Cash and cash equivalentsCash and cash equivalentsCash and deposits that can be turned into cash right away. It equals the ending cash on the cash flow statement.
Trade receivablesTrade receivablesMoney owed for goods or services already sold but not yet received. If it grows much faster than sales, it can be a sign the company isn't getting paid.
InventoriesInventoriesRaw materials, work in progress and finished goods held for sale. They become cash only once they are sold and collected.
Property, plant and equipmentProperty, plant and equipmentTangible assets used for many years, such as factories, machinery and store fixtures. Through depreciation they become an expense each year.
DepreciationDepreciationSpreading the purchase price of equipment over its years of use and expensing it each year. It is an expense for which no cash goes out that year.
Intangible assetsIntangible assetsAssets with no physical form that still earn money, such as trademarks, patents, software and goodwill.
Days sales outstandingDays sales outstandingTrade receivables ÷ sales × 365. It shows the average number of days it takes to receive cash after a sale.
RevenueRevenueThe total amount a company earns by selling goods and services. It is the amount before deducting costs.
Capital expenditureCapital expenditureMoney a company spends to buy production assets such as factories, machinery and equipment. It becomes revenue for equipment and construction companies and increases future production capacity.
This is educational material and not investment solicitation. There is no guarantee that past relationships will repeat in the future.