What are Fixed Assets?

Fixed assets refer to long-term tangible assets that are used in the operations of a business. This type of asset provides long-term financial gain, has a useful life of more than one year, and is classified as property, plant, and equipment (PP&E) on the balance sheet. Key Characteristics of a Fixed Asset The key characteristics of a fixed asset are listed below: 1. They have a useful life of more than one year Fixed assets are non-current assets that have a useful life of more than one year and appear on a company’s balance sheet as property, plant, and equipment (PP&E). 2. They can be depreciated With the exception of land, fixed assets face depreciation to reflect the wear and tear of using the fixed asset. 3. They are used in business operations and provide long-term financial gain Fixed assets are used by the company to produce goods and services and generate revenue. They are not sold to customers or held for investment purposes. 4. They are illiquid Fixed assets are a non-current asset on a company’s balance sheet and cannot be easily converted into cash. Importance of Fixed Assets Fixed assets are crucial to any company. Apart from being used to help a business generate revenue, they are closely looked at by investors when deciding whether to invest in a company. For example, the fixed asset turnover ratio is used to determine the efficiency of fixed assets in generating sales. Companies that more efficiently use their fixed assets enjoy a competitive advantage over their competitors. An understanding of what is and isn’t a fixed asset is of great importance to investors, as it impacts the evaluation of a company. Examples of Fixed Assets Land Machinery Buildings and facilities Vehicles (company cars, trucks, forklifts, etc.) Furniture Computer equipment Tools Although the list above comprises examples of fixed assets, they aren’t necessarily universal to all companies. In other words, what is a fixed asset to one company may not be considered a fixed asset to another. For example, a delivery company would classify the vehicles it owns as fixed assets. However, a company that manufactures vehicles would classify the same vehicles as inventory. Therefore, consider the nature of a company’s business when determining fixed assets.

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