Introduction to Fixed Assets Examples
This article will discuss about the Fixed Asset Examples but before that let’s understand what fixed asset is?:
Assets in a balance sheet can be broadly divided into two categories, which are subcategorized as follows:-
Non-Current Assets
- Fixed Assets
- Intangible Assets
- Other Non-Current Assets (investments and Deferred Charges)
Current Assets
Fixed Assets: are the noncurrent tangible assets that are used by the business entity for income-generating operations.
- Noncurrent means entity purchased the fixed assets in order to produce goods and services and will not be sold within one financial year.
- Tangible means fixed assets have a physical existence.
- Examples of fixed assets are land, building, machinery, manufacturing and operational equipment, furniture and fixtures, vehicles, etc.
Fixed assets are coined as “property, plant, and equipments (PP&E)” under the company’s balance sheets as per IFRS and GAAP guidelines.
Firms other than companies can use the term “fixed assets” or “capital assets” in their balance sheets.
Examples of Fixed Asset (With Excel Template)
Let’s take an example to understand the calculation of Fixed Assets in a better manner.
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Example #1 – Identification and Calculation of Total Fixed Assets
Hydra Enterprises is a proprietorship firm in the business of retail. To initiate its operations, it purchased a store (land + building) of 2000 sq. feet for $2 million. It also purchased some furniture and fixtures worth $500,000, two loading vehicles cost $100,000, franchise rights worth $50,000 and brand recognition and trademarks worth $35,000.
A retail firm has large inventory investments. Hydra’s inventory at Dec 31, 2018 = $1 million
Hydra reports the store at its historical or acquisition cost. Furniture and fixtures are depreciated at 10% per annum. Vehicles are depreciated using the SLM method, the useful life of each vehicle is 10 years with a salvage value of 5000 each.
Assume all this transaction takes place on January 1, 2018. Compute the value of fixed assets for the financial year ending December 31, 2018.
Solution:
Total Fixed Assets is calculated as:
- Total Fixed Assets = $2541000
Depreciation for Vehicle is calculated as:
Depreciation for Vehicle = (Acquisition Cost – Salvage Value) / Useful Life
Vehicle: Acquisition Cost
- Vehicle: Acquisition Cost = 2 * $50000
- Vehicle: Acquisition Cost = $100,000
Vehicle: Salvage Value
- Vehicle: Salvage Value = 2* $5000
- Vehicle: Salvage Value = $10,000
Depreciation for Vehicle
- Depreciation for Vehicle = Net Value / Useful Life
- Depreciation for Vehicle = ($100000 – $10000) / 10
- Depreciation for Vehicle = $9000
Note: Franchise rights, brand recognition and trademarks are intangible assets. Inventory is a noncurrent asset; hence all this assets are not included while computing fixed assets.
Example #2 – Fixed Asset Account
Hydra Inc purchased a machine during January 2016 worth $1.5 million (trade discount = $150,000) and incurred $50,000 for transportation and installation. The estimated useful life of the machine is 8 years and a salvage value of $350,000. Hydra follows the WDV method @ 16% to depreciate its assets.
During revaluation in March 2018, the asset appreciated by 20%. The machine was ready to use during May 2016 but actually put to use during June 2016.
Prepare a fixed asset account for the useful life of the asset.
Solution:
Fixed Asset Account
Example #3 – Fixed Asset Turnover Ratio
It measures the efficiency of the company as how much sales it can generate using its fixed assets.
Hydra Inc is recruiting for an asset manager; Steve Rogers in an interview has been tasked to calculate the ratio of Fixed Assets Turnover from the given information about a business firm and make valid concluding statements.
Given: according to the P&L statement of a software company, credit sales = $325,000 and cash sales = $475,000. The fixed assets include the following:-
- Computers = $350,000, Accumulated depreciation = $225000
- Furniture and fixtures = $150000, Accumulated depreciation = $50000
- Other office equipment = $25000.
Calculation of Net Sales:-
Net Sales = Cash Sales + Credit Sales
- Net Sales = $325,000 + $475,000
- Net Sales =$800,000
Calculation of Net Value of Fixed Assets:-
Asset Turnover Ratio is calculated using the Formula
Asset Turnover Ratio = Net Sales/(Fixed Assets – Accumulated Depreciation)
- Asset Turnover Ratio = $800000 / ($525000 – $275000)
- Asset Turnover Ratio = $800000 / ($250000)
- Asset Turnover Ratio = $3.2
Note:
Mr. Steve calculates the Asset T/O ratio = 3.2 which means the company is able to generate sales 3.2 times of its net fixed asset value.
He concluded that the ratio of 3.2 times might be a good ratio for a software industry since it does not employ heavy machinery but the most important assets are computer systems and skilled labor.
However, peer comparison of ratios with companies in the software industry must be made.
Conclusion
Fixed Assets are the primary resources to conduct the income-generating operations of a business and also provides a physical structure to the enterprise. Thus it is very important for an enterprise (irrespective of size) to accurately evaluate its fixed assets and report in its balance sheets.
Fixed assets determined by applying accepted methods and principles of depreciation and disposal represents the true position of the company, hence it is also a measure of the financial health of the company.
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