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It was all started by a poorly worded multiple choice question in a textbook. The question had been worded so vaguely that the student couldn’t tell if it was referring to “monies owed to” (accounts receivable) or “monies owed by” (accounts payable). The student took a moment to admire the fact that the textbook’s author had managed to construct a question that could have a totally opposite meaning depending on how it was read while providing no clue as to which it should be. It was after all a talent of some sort; not necessarily a desirable one, but a talent all the same. Unfortunately, the issue was further complicated by the fact that the selection of answers included both a. assets (accounts receivable) and b. liabilities (accounts payable), so without further guidance there were two possibly correct answers. Or at least that was what the student assumed. The third choice, c. shareholders’ equity, was not relevant to the conversation with the instructor although it does bear mentioning as it impacts the story to be told.
The student, of course, did what any student would do in such a situation, she pointed out the problem to her instructor. The instructor informed her that although the question was indeed poorly worded, it had to be referring to “monies owed by” (accounts payable) and the answer had to be liabilities. If it were referring to “monies owed to” (accounts receivable) then there would be no correct answer. The student cried foul, “monies owed to” (accounts receivable) is an asset; therefore, there is a legitimate answer for both possibilities. The student fought a losing battle, finally conceding sarcastically that maybe she was wrong, maybe accounts receivable wasn’t an asset after all.
Now you may be wondering why this little exchange was so important. Well, it took place online and the conversation in question fell into the lap of Accounts Receivable, who belonged to a small, successful, long-standing company. He was a little naive, Accounts Receivable, and intended to believe what he read on the internet. This is probably due to the fact that the company had an excellent collections record and Accounts Receivable lacked those older balances that tended to make one more cynical. It is also possible that the sarcasm of the student’s final statement was lost on him. Either way, once he read the debate and the concluding statement, he was convinced that he wasn’t an asset after all. Not only that, he was also not a liability or part of shareholders’ equity. He had no place at all in what he always considered his home.
Panic began to set in, and Accounts Receivable’s eyes started to water. No, he wouldn’t cry. He was a boy and boys do not cry. He looked around quickly. He wasn’t sure if he had said that out loud or not. He really hoped he hadn’t because he was pretty certain that Short-Term Investments would consider that type of statement sexist, and she really hated sexist statements. She was a volatile individual; one could never be sure how she would react. If she had a good day he might just get growled at, a bad one could get him punched in the head. A few years ago, Cash had gone as far as to suggest they put her on valproic acid(1) to get her mood swings under control although nothing had come of that as far as Accounts Receivable knew. He decided it would not be advisable to ask Short-Term Investments about his current predicament.
Cash! Perhaps Accounts Receivable could talk to her as she was level headed and knowledgeable about assets in general. She might be able to provide insight in to what he was if he wasn’t an asset. But then Cash was always so busy, flowing in and out almost as though she were stuck in some sort of revolving door. It was probably best that he not disturb her.
Accounts Receivable considered crossing that ominous line that marked the boundaries of his home (or what he always thought was his home) and speaking to those on the other side, but quickly dismissed it. He really didn’t know how to handle any of the liabilities. They could be quite moody. Sure, humans loved to talk about how great leveraging was, but if one should happen to get a few bad ratios then suddenly you’re a terrible thing. At one point, a few years ago, it was nearly impossible to approach them as they had gotten so nasty. Come to think of it, it was around the same time that Short-Term Investments went off the deep end. Accounts Receivable had to wonder if the two were connected somehow. At that time, Accounts Receivable might have been glad to escape the insanity, but now he liked his home and hoped what he read turned out to be wrong. However, as he wasn’t sure where the DSCR(2) or any other debt ratios currently stood, he decided to give consulting with Accounts Payable and Long-Term Liabilities a pass.
Shareholders’ Equity might have an idea of what Accounts Receivable really was, if he wasn’t an asset, but it could be so insufferable(3). It liked to go on and on about how it represent the owners’ interests. If the company has a good ROE(4), it’s all Shareholders’ Equity doing, but if the ROE isn’t so hot then suddenly everyone else is too to blame. He really didn’t envy Retained Earnings at all, as it tended to take most of the heat when the ROE was down although Shareholders’ Equity wasn’t above pointing the finger at what it called “weak assets” as well. Accounts Receivable never knew exactly how to refer to the androgynous members'(5) of his family (if it really was his family), but Retained Earnings was a good whatever, always protecting Net Income or its twin Net Loss from Shareholders’ Equity’s wrath in the lean years. However, Retained Earnings tended to know more about the happenings on the Net Income Statement than its own home.
That left asking the assets below him. And by below, Accounts Receivable meant their physical position in the home, not that he was in any way better than them. He didn’t want any misunderstandings about that. He, after all, was not like Shareholders’ Equity. He did not consider himself superior to anyone else, and if he had, recent discoveries would have knocked that attitude right out of him. What was he if he wasn’t an asset? Other than homeless, Accounts Receivable wasn’t sure at all. He hugged himself tightly.
First, he considered Inventory who was a very nice chap. However, conversations with him had a tendency to devolve into heated discussions regarding LIFO(6) versus FIFO(7). Inventory always wanted to use LIFO to establish his value, but as the shelves were stocked on what Accounts Receivable felt was a FIFO philosophy, he argued that FIFO should be used. He didn’t feel like having that talk in the middle of his own identity crisis, so he skipped talking to Inventory as well.
Next, he thought of the various fixed assets. They were an interesting mix, but they tended to stick to themselves as they felt the longer they were around the less that they were appreciated(8). Except for Building, who had been around for what seemed like forever. She always felt appreciated and not just because she housed everyone and everything. Her value seemed to climb, but that was the nature of real estate, or so Accounts Receivable had been told. The other fixed assets did like to remind her that any appreciation she got wouldn’t really show until she was sold, but that never got her down. Building seemed wise but intimidating to the younger asset (if he was an asset) and Accounts Receivable couldn’t quite bring himself to approach her on the subject. He had no idea how to choose among the remaining fixed assets, and didn’t want to start any favouritism fights, so he sighed and moved on.
He was running out of options. All that was left was Long-Term Investments. Accounts Receivable didn’t really know him very well other than that he, like Short-Term Investments, had more to do with things outside of the company. That tended to make them both a little stand-offish. Compared to Short-Term Investments' moods; however, Long-Term Investments was like a rock. Approaching him was much less risky and if Accounts Receivable wanted answers to his dilemma, he was going to have to bite the bullet and talk to the man.
Long-Term Investments had noticed Accounts Receivable’s unhappiness as he approached and queried as to the reason for the long face. When he heard Accounts Receivable’s tale he was shocked and demanded to see this information first hand. Upon perusing the exchange, Long-Term Investments concluded that the student was being sarcastic when agreeing that accounts receivable was not an asset. He explained to Accounts Receivable that sometimes sarcasm doesn’t translate that well into the written word. He also noted that the instructor appeared to be clinging to the information provided in the textbook’s answer key and warned of the dangers of listening to a person who behaved in such a manner despite mounting evidence to the contrary.
Accounts Receivable was happy at this news, he was an asset after all and that was all he needed to know. However, Long-Term Investments was on a roll. He pointed out that without Accounts Receivable how would the Balance Sheet even balance? How could they even call it a Balance Sheet? Their world, their universe was tied up in balancing, without it they all became a joke. Furthermore, imagine what a nightmare the NOA(9) would be if they had to rely on Short-Term Investments and her fluctuating ROI(10) to ensure that the operating assets were worth more than the operating liabilities.
It was at this moment that Short-Term Investments swooped in and wrapped Accounts Receivable in a big bear hug and assured the boy that he would always have a home alongside her on the Balance Sheet. She glared at Long-Term Investments over his ROI comment. While it was true that his ROI was generally better when the markets were down, she was the one who shone when they were up. She reminded Accounts Receivable to always verify anything he read on the internet before believing it to be true (even if it is a usually reliable source). He didn’t want to be like the instructor after all, hanging on to inaccurate beliefs.
Accounts Receivable was content. He was an asset, he had a home, and he was getting a little snuggle time with Short-Term Investments. Life was good. Or at least it was until Short-Term Investments went on to claim that the “Fiscal Cliff” they have been hearing so much about had to be the stuff of urban legends. Nothing that scary could be real. What the heck was a “Fiscal Cliff”?
Footnotes:
(1) Generic name of a drug used to treat bipolar disorder when the mood swings have a rapid cycle. (back)
(2) Debt-Service Coverage Ratio. (back)
(3) Having an entire section of the Balance sheet named after it may have gone to Shareholders’ Equity’s head. (back)
(4) Return on Equity. (back)
(5) Shareholders’ Equity insists that it (and those directly associated with its section) are above needing a gender, considering itself androgynous. This is not why one usually considers oneself androgynous. (back)
(6) Last In, First Out. A method of calculating inventory. (back)
(7) First In, First Out. A method of calculating inventory. (back)
(8) Depreciation can do that to an asset. (back)
(9) Net Operating Assets. (back)
(10) Return on Investment. (back)