Question

Identify whether each of the following items is a financial asset:

a) Prepaid expense
b) Inventory
c) Investment in shares of another entity
d) Investment in a joint venture
e) Bond issued by the reporting entity

Answer 1

Prepaid expenses and inventory are not financial assets, while investments in shares, joint ventures, and bonds are financial assets.

Step-by-step explanation:

Financial assets are items of value that a firm or an individual owns. They can be divided into various categories based on their characteristics.

The items mentioned in the question can be categorized as follows:

Prepaid expense: This is not a financial asset. It represents a future expense already paid for, such as prepaid rent or insurance. It is recorded as an asset initially but gets consumed over time.Inventory: This is not a financial asset. It represents goods or materials held by a company for production, resale, or distribution, and it is recorded as a current asset.Investment in shares of another entity: This is a financial asset. It represents an ownership stake in another company and is recorded as an investment.Investment in a joint venture: This is a financial asset. It represents an investment made in a jointly controlled entity and is recorded as an investment.Bond issued by the reporting entity: This is a financial asset. It represents a debt instrument issued by the reporting entity to raise capital and is recorded as an investment.