What Is a Fixed Asset?
Let me tell you directly: fixed assets are those long-term tangible properties or equipment that are crucial to a company's day-to-day operations. Think buildings, machinery, vehicles—these show up on the balance sheet as property, plant, and equipment, or PP&E. They're not like current assets that you can quickly turn into cash; instead, they're there for the long haul, helping with production, running the business, or even renting out to others. We depreciate them to show how they wear out over time, and that's key for your financial reports and analysis.
Key Takeaways
- Fixed assets are long-term tangible resources like buildings, machinery, and vehicles that a company uses to operate its business and are not expected to be sold or depleted within a year.
- These assets are listed on a company's balance sheet as property, plant, and equipment (PP&E) and are subject to depreciation to account for wear and tear over time.
- The acquisition or disposal of fixed assets affects a company's cash flow statements and involves considerations like salvage value and potential impairment write-downs.
- Information on fixed assets is crucial for investors as it helps in accurately assessing a company's financial health and future growth potential, particularly in capital-intensive industries.
- Fixed assets are distinct from current assets, which are more liquid and can be converted to cash within a year, highlighting their role in a company’s long-term financial planning.
Understanding Fixed Asset Accounting
On a company's balance sheet, you'll see assets split into current and noncurrent based on how long they'll last. Current assets are the liquid ones you can convert to cash within a year—cash itself, accounts receivable, inventory, prepaid expenses. Fixed assets, though, are noncurrent; they're not easy to cash out. They include things like long-term investments, deferred charges, and intangible assets too, but the fixed ones have a physical form and sit as PP&E. You buy them to make goods, run your office, or rent out. Remember, we depreciate fixed assets, but not current ones.
Depreciating Fixed Assets: What You Need to Know
Fixed assets lose value as they get older, and since they generate income over the long term, we expense them differently. Tangible ones get depreciated periodically, intangibles get amortized. Each year, you expense a chunk of the asset's cost, reducing its value on the balance sheet to match its actual worth. Different depreciation methods can make the book value differ from what it's worth on the market today. One thing: land is a fixed asset, but you don't depreciate it.
How Fixed Assets Are Acquired and Disposed
When you acquire or dispose of a fixed asset, it goes under cash flow from investing activities. Buying one means cash going out; selling means cash coming in. If the asset's value falls below its net book value, you do an impairment write-down, adjusting it down on the balance sheet because it's overvalued compared to market. At the end of its useful life, you might sell it for salvage value—that's what you'd get if you broke it down and sold the parts. Sometimes it's obsolete and you just write it off without any cash back, removing it from the balance sheet since it's no longer in use.
FAQs
What is an example of a company with fixed assets? For a produce company, their owned delivery trucks count as fixed assets. A company parking lot does too. But personal cars for commuting? Those aren't fixed assets, and buying rock salt for the lot is just an expense.
Why should investors care about a company's fixed assets? This info helps with accurate financial reporting, valuations, and analysis. You use it to gauge the company's health and decide on buying shares or lending money. In manufacturing or other capital-heavy industries, fixed assets are huge—negative cash flows from buying them might mean the company is investing for growth.
What are other types of noncurrent assets? Besides fixed ones, there are long-term investments and intangibles like goodwill, copyrights, trademarks, and intellectual property—they don't have physical form but last long-term.
Is a car a fixed asset? It depends on use. If it's for business operations, like a delivery car generating income, yes—it's a fixed asset. If it's for personal use, no, and it doesn't go on the balance sheet.
The Bottom Line
A fixed asset is that long-term tangible property or equipment you own and use to make money— not something you'll sell or use up in a year. It often appears as PP&E on the balance sheet, gets depreciated, while intangibles get amortized. Compare them to current assets, which you can turn into cash quickly. That's the core of it for your financial planning.
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