Fixed Assets

Definition

Fixed assets are long-term, tangible assets that a company owns and uses in its operations to generate revenue. They are not intended for sale and have a useful life of more than one year, such as land, buildings, machinery, and equipment.

5 Must Know Facts For Your Next Test

1. Fixed assets are recorded on a company's balance sheet and are not intended for resale, unlike current assets.
2. The cost of a fixed asset includes the purchase price, delivery, and installation costs, as well as any necessary modifications or improvements.
3. Depreciation is used to allocate the cost of a fixed asset over its useful life, reflecting the gradual consumption or use of the asset.
4. Fixed assets are subject to impairment testing, which involves comparing the asset's carrying value to its recoverable amount to determine if any write-downs are necessary.
5. The decision to capitalize or expense an item is based on whether the item meets the criteria for a fixed asset, such as a useful life of more than one year and the ability to generate future economic benefits.

Review Questions

• Explain the key factors that determine whether a company should capitalize or expense an item.
  • The decision to capitalize or expense an item is based on whether the item meets the criteria for a fixed asset. The main factors to consider are the item's useful life, the ability to generate future economic benefits, and the cost of the item. If the item has a useful life of more than one year and can be used to generate future revenue or cost savings, it should be capitalized as a fixed asset. If the item has a useful life of less than one year or does not contribute to future economic benefits, it should be expensed in the current period.
• Describe the process of recording and accounting for fixed assets on a company's financial statements.
  • Fixed assets are recorded on a company's balance sheet at their historical cost, which includes the purchase price, delivery, and installation costs, as well as any necessary modifications or improvements. The cost of the fixed asset is then allocated over its useful life through the process of depreciation, which is recorded as an expense on the income statement. The net book value of the fixed asset, which is the original cost minus accumulated depreciation, is reported on the balance sheet. Additionally, fixed assets are subject to impairment testing, where the asset's carrying value is compared to its recoverable amount to determine if any write-downs are necessary.
• Analyze the importance of properly accounting for fixed assets in a company's financial reporting and decision-making processes.
  • Accurately accounting for fixed assets is crucial for a company's financial reporting and decision-making processes. The proper capitalization and depreciation of fixed assets ensure that the company's financial statements accurately reflect the value of its long-term productive assets and the associated costs of using those assets. This information is essential for investors and lenders to assess the company's financial health, profitability, and long-term viability. Additionally, the fixed asset information is used in various financial analyses, such as return on assets (ROA) and asset turnover ratios, which inform management's strategic decisions regarding capital investments, asset replacements, and operational efficiency. Proper fixed asset accounting also ensures compliance with accounting standards and supports tax planning and reporting.

Related terms

Capital Expenditure (CapEx): The funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, and equipment, with the goal of maintaining or increasing the company's future productive capacity.

Depreciation:

The systematic allocation of the cost of a fixed asset over its useful life, reflecting the gradual consumption or use of the asset.

Impairment: The reduction in the value of a fixed asset due to factors such as obsolescence, physical damage, or changes in market conditions, which results in the asset's carrying value exceeding its recoverable amount.