Fixed assets: definition, types, financial impact
- Fixed assets are non-current assets that businesses will use for more than a year.
- Common examples of fixed assets include land, factories and machinery.
- Analysts can look at fixed assets and associated financial ratios when comparing companies.
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A fixed asset is an accounting term used to distinguish between assets that will be quickly depleted (i.e. current assets) and assets that will provide value for a longer period. The fixed assets of a business can include the land, machinery and other tangible equipment that it will use to create the products and services that it sells.
What are fixed assets?
Property, plant and equipment are long-lived tangible assets that a business plans to use for more than one operating cycle. Mike Zeiter, a CPA / PFS and CFP who runs Zeiter Tax Services, generally says the easiest way to determine if something is considered capital property is if it will last longer than a year.
Fixed assets are opposed to current assets, which are depleted during the same operating cycle. For example, a toy company can buy an assembly machine that will last 20 years (a fixed asset) and use it to combine toy parts (short-term assets) to create the toys it sells.
Fixed assets generally refer to tangible assets as opposed to non-current intangible assets, such as patents, brands and goodwill.
How capital assets work
Fixed assets are also referred to as non-current assets, long-lived assets, or long-lived assets, and they are often listed in the property, plant and equipment (PPE) section of a company’s balance sheet.
To be considered a fixed asset, an asset must be:
- Not current
- Not sold directly to customers
- Used for more than one operating cycle (often a year)
Most tangible capital assets also depreciate over their useful lives – land is an exception. Rather than writing off the cost of the asset when it is first purchased, the company will make deductions and reduce the value of the asset over time.
For example, if the toy company’s assembly machine costs $ 20,000, is expected to be useful for 20 years, and won’t be worth anything, the company can deduct $ 1,000 each year.
What types of fixed assets can a company have?
The fixed assets of a business can depend on the type of business and the products or goods it sells. Zeiter says a few common examples include:
- Office furniture
However, whether something is classified as an asset can also depend on how the business uses it.
For example, a data storage company may buy computers that it will use to sell services to customers for years to come. Computers are an asset in this case. But the company that builds and sells the computers wouldn’t consider them a capital asset.
What is the impact of fixed assets on a company’s financial statements?
âThere are three main financial statements that all businesses use. The income statement, the balance sheet and the cash flow statement,â Ziete explains. “[And] there are many ways in which fixed assets impact the financial statements. ”
Understanding where they record and how they can impact or reflect aspects of a business’s finances can be important for business analysis.
The balance sheet
A company’s balance sheet provides an overview of the assets, liabilities and equity of the business.
âFixed assets are recorded on the balance sheet as part of the company’s assets when they are put into service,â says Zeiter.
Tangible fixed assets can be listed in the tangible fixed assets (tangible assets) section of a company’s balance sheet. Current assets and non-current intangible assets are listed separately.
âAs the asset depreciates, an offsetting entry for the accumulated depreciation reduces the asset’s value on the balance sheet,â Zeiter notes. Accumulated depreciation can have its own line on the balance sheet, with a negative number to show how depreciation decreases the current value of the asset.
The income statement
An income statement, also called an income statement (P&L), shows the income and expenses of a business during a specific reporting period.
“Purchases of fixed assets are not recorded in the income statement,” says Zeiter. “Instead, they are expensed over the expected life of the asset using depreciation. Assets such as buildings are depreciated over a longer period than assets such as computers.”
The cash flow statement
A cash flow statement shows how much money comes in and goes out of a business during a reporting period, such as a month or a year.
âPurchases and sales of fixed assets are considered investing activities in the statement of cash flows,â explains Zeitier. If a business sells a fixed asset, the money can be recorded as proceeds from the sale of fixed assets.
The financial report
Understanding what fixed assets are and how they are recorded in a company’s financial statements can help investors analyze a company’s financial condition.
âThere are a variety of formulas that allow investors to compare metrics between companies using fixed asset amounts,â adds Zeiter. These include:
- Fixed asset turnover rate, which compares a company’s net sales to the value of its capital assets. A higher ratio may indicate that the business can effectively use its assets to make money.
- Average age ratio, which indicates the average age of the company’s depreciable assets. A higher average ratio may indicate that the business will need to replace its fixed assets soon.
What is considered good or bad can vary by industry. But you can look at the fixed assets of similar companies and the resulting ratios to better understand which companies are the best investment opportunities.