A fixed asset (also known as plant) is a tangible piece of property owned by a firm and used in the production of the company’s income. Such assets are long term assets that are not expected to be consumed or converted into cash any time soon. Being a long term asset, it is expected to serve for nothing less than one year. So the property is bough and fixed up to perform a particular duty for at least a year, in which is it expected to have generated the cost of its purchase.
Good and common examples of fixed assets are
- Real estate properties
- Computer equipments
On a conventional note, fixed assets are tangible, but in some cases, some intangible assets like trademarks and patents can be classified as fixed assets. More of such intangible assets that fall under this category are
- Copy rights
As can be seen with the examples listed above, fixed assets serve the purpose of the production of products and services, for rentals to third parties, and for internal use. A production company will benefit from a delivery vehicle as a fixed asset that can help reduce cost and increase the efficiency of the business.
IMPORTANCE OF FIXED ASSETS
How much asset owned by a company goes a long way in estimating the value of that company. It helps to create financial reports, business valuation, and thorough financial analysis.
1. FINANCIAL REPORTS:
Assets help in the creation of financial reports and at a lower cost too. The computers and computer equipments for instance may not be used in the production of toilet tissues in a paper factory, but it is helpful in record keeping of how production activities are going in the company regarding profits and losses.
2. BUSINESS VALUATION:
The strength and health of a business reflects on how much assets used to run the business. A paper factory that does not have a paper machine will have to spend so much to hire. This reduces the amount of profit such a company can make, and reduces its strength of production. Why should one start a paper company that does not have a paper machine in the first place?
3. FINANCIAL ANALYSIS:
If an investor is considering making an investment into a company, the financial analysis plays an important role of whether it will be a good idea or not. The assets owned by the company helps in the process of evaluating a business to determine their performance and suitability.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.