ABC Inc. has just entered into the business of selling antique cars. The company management decided to lease the premises for the business instead of buying the office premises. They ended up paying an advance rent of $5 million dollars for the initial period of five years. The entire amount was recorded as an asset in the form of prepaid expense. When questioned by the auditors, the CFO of ABC Inc. mentioned, "An asset is just an expense waiting to happen." Discuss the validity and implications of this statement.
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First, the general statements and theory of asset utilization:
Conceptually, the statement is true for most assets. Consider the definition of an asset as an economic resource which can be use to provide future benefit. That means assets will be used up to generate sales and profits.
Cash is the ultimate asset and in theory, it would be the last remaining account on the books and records of a company at the time of shutting down. All operations would cease, all debts would be paid and all other assets would be used up or sold for cash.
Assets can be used to produce cash flow, ...
'An asset is just an expense waiting to happen.' The 383 word solution discusses the validity and implications of this statement.