Current Assets vs Fixed Assets: An Overview
Businesses own a variety of assets that are used for different purposes. These assets also have different periods in which they are held by a company. Companies classify the assets they own and two of the main categories of assets are current assets and fixed assets; both are recorded on the balance sheet.
The balance sheet shows the resources or assets of a business while showing how those assets are financed; either by borrowing, as indicated in liabilities, or by issuing equity, as indicated in equity.
Current assets are short-term assets, which are held for less than one year, while fixed assets are generally long-term assets, held for more than one year. However, there are other differences between them.
Key points to remember
- Current assets are short-term assets that are generally used in less than a year. Current assets are used in the daily operations of a business to keep it running.
- Fixed assets are long-lived physical assets, such as property, plant and equipment (PP&E). Fixed assets have a useful life of more than one year.
- Knowing where a company allocates its capital and how it finances these investments is essential information before making an investment decision.
- It is also important to know how the company plans to raise capital for its projects; whether the money comes from a new equity issue or funding from banks or private equity firms.
Current assets
Current assets are assets that can be converted into cash during a financial year or an operating cycle. Current assets are used to facilitate day-to-day operational expenses and investments. Therefore, short-term assets are liquid, which means they can be easily converted into cash.
Here are some examples of current assets:
fixed assets
fixed assets are non-current assets that a company uses in its production of goods and services that have a lifespan of more than one year. Fixed assets are recorded on the balance sheet and classified as property, plant and equipment (PP&E). Fixed assets are long-lived assets and are called tangible assets, which means that they can be physically affected.
Here are some examples of fixed assets:
- Vehicles like trucks
- Office furniture
- Machinery
- Buildings
- Ground
Main differences
Fixed assets undergo depreciation, which divides a company’s cost for non-current assets to expense them over their useful life. Depreciation helps a business avoid a large loss when purchasing a capital asset by spreading the cost over many years. Current assets are not depreciated due to their short lifespan.
Non-current assets (like fixed assets) cannot be liquidated easily cash in to meet operational expenses or short-term investments. Fixed assets have a useful life of more than one year, while current assets must be liquidated within a fiscal year or operating cycle. Businesses can rely on the sale of current assets if they need cash quickly, but they cannot with fixed assets.
For example, if the economy is in a recession and a business is not making any profit, but it still has to pay off its debt next month and has no cash reserves to do so, it can sell its marketable securities in a few days and obtain cash. . On the other hand, he would not be able to sell his factory in a few days to obtain cash because this process would take much longer.
Special Considerations
Capital investment is money invested in a business for the purpose of advancing its business objectives.
Capital investment and fixed assets
Capital investment decisions are long-term financing decisions that involve capital assets such as fixed assets. Capital investments can come from many sources, including angel investors, banks, equity investors, and venture capitalists. Capital investments may include the purchase of equipment and machinery or a new manufacturing plant to expand a business. In short, capital investments for fixed assets mean that a company plans to use the assets for several years. These purchases are also called capital expenditures.
Capital investment and current assets
Although capital investments are generally used for long-term assets, some companies use them to finance working capital. Today’s asset capital investment decisions are short-term financing decisions critical to the day-to-day operations of a business. Current assets are essential to the continued operation of a business to ensure that it covers recurring expenses.
Capital investment decisions consider many components, such as project cash flow, incremental cash flow, pro forma financial statements, operating cash flow, and asset replacement. The goal is to find the investment that yields the highest return while ignoring sunk costs.
Return on Invested Capital (ROIC) is a calculation used to assess a company’s efficiency in allocating the capital under its control to profitable investments. Return on investment gives an idea of how a company uses its money to generate returns.
There are several methods used to determine how to allocate capital to one investment versus another, including incremental analysis, by which a company can calculate cost differences between different investment options.
