Fixed assets are long-term assets that companies use to operate
- Fixed assets are noncurrent assets that companies will use for more than a year.
- Common examples of fixed assets include land, factories, and machinery.
- Analysts may look at fixed assets and related financial ratios when comparing companies.
What are fixed assets?
Fixed assets are tangible long-term 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, says generally, the easiest way to determine if something is considered a fixed asset is if it will last for more than one year.
Fixed assets are contrasted by current assets, which get used up within a single operating cycle. For example, a toy company may buy an assembly machine that will last 20 years (a fixed asset) and use it to combine toy parts (current assets) to create the toys it sells.
Fixed asset generally refers to tangible assets as opposed to intangible noncurrent assets, such as patents, trademarks, and goodwill.
How fixed assets work
Fixed assets are also called noncurrent assets, long-term assets, or long-lived assets, and they're often listed under the property, plant, and equipment (PP&E) section of a company's balance sheet.
To qualify as a fixed asset, an asset must be:
- Not sold directly to customers
- Used for more than one operating cycle (often, a year)
Most tangible fixed assets also depreciate over their lifetime — land is an exception. Rather than taking a write-off for the cost of the fixed asset when it's first bought, the company will take deductions and lower the value of the asset over time.
For example, if the toy company's assembly machine cost $20,000, is expected to be useful for 20 years, and will then be worth nothing, the company may deduct $1,000 each year.
Note: A fixed asset has an estimated useful life, the period during which the business can use it for its intended purpose, and salvage value at the end of its useful life. These can determine how much the business can deduct each year. Businesses can't depreciate land because land doesn't get used up.
What types of fixed assets might a company have?
A company's fixed assets could depend on the type of company and the products or goods it sells. Zeiter says some common examples include:
- Office furniture
However, whether something is classified as a fixed asset can also depend on how the company uses it.
For example, a data storage company might purchase computers that it will use to sell services to clients for years to come. The computers are a fixed asset in this case. But the company that builds and sells the computers wouldn't consider them a fixed asset.
How do fixed assets impact a company's financial statements?
"There are three primary financial statements that all businesses use. The income statement, balance sheet, and cash flow statement," says Ziete. "[And] there are a few ways that fixed assets impact financial statements."
Understanding where they're recording and how they may impact or reflect aspects of a business's finances can be important for analyzing a company.
The balance sheet
A company's balance sheet shows an overview of the company's assets, liabilities, and shareholder equity.
"Fixed assets are recorded on the balance sheet as part of the company's assets when they are put into service," says Zeiter.
The tangible fixed assets may be listed under the property, plant, and equipment (PP&E) section of a company's balance sheet. Current assets and intangible noncurrent assets are listed separately.
"As the asset depreciates, an offsetting entry for accumulated depreciation reduces the value of the asset on the balance sheet," notes Zeiter. The accumulated depreciation may have its own line on the balance sheet, with a negative number to show how the depreciation decreases the fixed asset's current value.
The income statement
An income statement, also called a profit and loss statement (P&L), shows a company's revenue and expenses during a specific reporting period.
"Fixed asset purchases are not recorded on the income statement," says Zeiter. "Instead, they are expensed over the expected lifetime of the asset using depreciation. Assets such as buildings are depreciated over a longer time period than assets such as computers."
The cash flow statement
A cash flow statement shows how much cash is moving into and out of a company during a reporting period, such as a month or year.
"Fixed asset purchases and sales are considered investment activity on the cash flow statement," says Zeitier. If a company sells a fixed asset, the money may be recorded as proceeds from the sale of property and equipment.
The financial takeaway
Understanding what fixed assets are and how they're recorded in a company's financial statements can help investors analyze a company's financial position.
"There are a variety of formulas that allow investors to compare metrics across companies using the fixed asset amounts," adds Zeiter. These include the:
- Fixed asset turnover ratio, which compares a company's net sales to the value of its fixed assets. A higher ratio may indicate the company can effectively use its assets to make money.
- Average age ratio, which shows the average age of the company's depreciable assets. A higher average ratio may indicate the company will need to replace its fixed assets soon.
What's considered good or bad may vary depending on the industry. But you can look at similar companies' fixed assets and the resulting ratios to better understand which companies are better investment opportunities.
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