Fixed And Current Assets

Fixed Assets:

• Long-term tangible assets used in business operations.
• Not intended for resale.
• Examples: land, buildings, machinery, vehicles, equipment.
• Subject to depreciation (except land).
• Essential for long-term production and service capabilities.

Current Assets:

• Short-term resources expected to be converted into cash within one year.
• Used to fund day-to-day operations.
• Examples: cash, inventory, accounts receivable, marketable securities.
• Crucial for liquidity and working capital management.

Key Differences:

• Liquidity: Current assets are liquid; fixed assets are not.
• Time Horizon: Current assets short-term; fixed assets long-term.
• Purpose: Current assets support operations; fixed assets support production.
• Valuation: Current assets at market value; fixed assets at cost minus depreciation.

Importance in Business:

• Fixed assets represent investment in production capacity.
• Current assets ensure ability to meet short-term obligations.
• Proper management of both is essential for financial health and operational efficiency.

Financial Analysis:

• Fixed asset turnover ratio measures efficiency in using fixed assets.
• Current ratio measures ability to pay short-term debts.
• Working capital (current assets - current liabilities) indicates short-term financial health.

This classification is fundamental in accounting and financial reporting, providing insights into a company's operational structure and financial stability.