Current Assets vs. Fixed Assets: An Overview
Companies own a variety of assets that are used for different purposes. These assets also have different time frames in which they are held by a company. Companies categorize the assets they own and two of the main asset categories are current assets and fixed assets; both are listed on the balance sheet.
The balance sheet shows acompany'sresources or assets while alsoshowinghow those assets are financed; whether through debt, as shown underliabilities, or through issuing equity,as shown in shareholder's equity.
Current assets are short-term assets, which are held for less than a year, whereas fixed assets are typically long-term assets, held for more than a year. However, there are other differences between them.
Key Takeaways
- Current assets are short-term assetsthat are typically used up in less than one year. Current assets are used in the day-to-day operations of a business to keep it running.
- Fixed assets are long-term, physical assets, such as property, plant, and equipment (PP&E). Fixed assets have a useful life of more than one year.
- Knowing wherea company is allocating its capital and how it finances thoseinvestments iscritical information before making an investment decision.
- It's alsoimportant to know how the company plans to raise capital for its projects;whether the money comes from a new issuance of equity or financing frombanksorprivate equity firms.
Current Assets
Current assetsare assets that can be converted into cash within one fiscal year or one operating cycle. Current assets are used to facilitate day-to-day operational expenses and investments. As a result, short-term assets are liquid, meaningthey can be readily converted into cash.
Examples of current assets include:
- Cash and cash equivalents,which might consist ofcertificates of deposit
- Marketable securities,such asequity ordebt securities
- Accounts receivable, or money owed to the company for selling their products and services to theircustomers
- Inventory
- Prepaid expenses
Fixed Assets
Fixed assetsare noncurrent assets that a company uses in itsproduction of goods and services that have a life ofmore than oneyear. Fixed assetsare recorded on the balance sheet and listed asproperty, plant, and equipment(PP&E). Fixed assets arelong-term assetsandare referred to as tangible assets, meaning they can be physically touched.
Examples of fixed assets include:
- Vehicles liketrucks
- Office furniture
- Machinery
- Buildings
- Land
Key Differences
Fixed assets undergo depreciation, which divides a company's cost for non-current assets to expense them over their useful lives. Depreciation helps a company avoid a majorloss when a company makes a fixed assetpurchase by spreading the cost out over many years. Current assets are not depreciated because of their short-term life.
Noncurrent assets (like fixed assets)cannot be liquidated readily to cash to meet short-term operational expenses or investments. Fixed assets have a useful life of over one year, while current assets are expected to be liquidated within one fiscal year or one operating cycle. Companies can rely on the sale of current assets if they quickly need cash, but they cannot with fixed assets.
For example, if the economy is in a downturn and a company is not making any profits but still needs to make a debt payment next month yet has no cash reserves to do so, it can sell its marketable securities within a few days and obtain cash. On the other hand, it would not be able to sell its factory within a few days to obtain cash as that process would take much longer.
Special Considerations
Capital investment is money investedin a company with the goal of advancing its commercial objectives.
Capital Investment andFixed Assets
Capital investment decisions are long-term funding decisions that involve capital assets such as fixed assets.Capital investments can come from many sources, including angel investors, banks, equity investors, and venture capital firms. Capital investments might include purchasesofequipment and machinery or a new manufacturing plant to expand a business. In short, capital investments for fixed assets mean acompany plans to use the assets for several years. These purchases are also known as capital expenditures.
Capital Investment andCurrentAssets
Althoughcapital investments are typically used for long-term assets, some companies use themto finance working capital. Current asset capital investmentdecisions are short-term funding decisions essential to a firm’s day-to-day operations.Current assets are essential to the ongoing operationof a companyto ensure it covers recurring expenses.
Capital investment decisionslook at many components, such as project cash flows, incremental cash flows, pro forma financial statements, operating cash flow, and asset replacement. The objective is to find the investment that yields the highest returnwhile ignoring anysunk costs.
Return on invested capital(ROIC) is a calculation used to assess a company's efficiency at allocating the capitalunder its control to profitable investments. Return on invested capitalgives a sense of how well a company is using its money to generate returns.
There are severalmethods used in determining how to allocate capital to one investment versus another, includingincremental analysis,whereby a companycan calculate the differences in cost between different investment options.
