Fixed Assets vs. Operating Assets

06.06.2013

Fixed assets are those which are helpful and utilitarian for more than one year. Some of the examples are buildings, computers and other tools. It is quite usual for people to use the term operating assets to represent fixed assets. However, as per the website ‘Accounting-tools’ operating assets   are only such assets which businesses use for creating income. Operating assets may also comprise of fixed and current assets.

Fixed Assets

Fixed assets or PP&E refer to plant, property and equipment. These are long lasting assets that balance sheet reflects. Straight line method of depreciation is usually adopted for calculation of depreciation. In this method, annual depreciation is calculated by dividing the price of an asset by its functional life. The net value, also called book value of an asset is calculated by deducting its accumulated depreciation from the cost of its acquisition. Book value of fixed asset may not necessarily be the same as its market value.

Operating Assets

Operating assets are utilized for producing revenue. Assets that don’t yield any gain on investment are called operating assets. . For instance, inventory comprising of obsolete machines, parts or technologies are not included among operating assets. Likewise, receivables yet to be collected or due since long and surplus or unserviceable equipment can’t be considered as a component of operating assets. Referring to ‘Accounting-tools’ once again, the management should revise the assets of its business and decide the ones that can be eliminated without harming its operations.

Ratios

Ratios are used for understanding relationships among different financial elements. Management, as well stakeholders of a company use different ratios to assess trends and compare the performance of their company to the average of similar industries and for identifying likely problematic areas. For example, the net sales of a company divided by its fixed assets gives us the fixed asset ratio. So, it is not difficult to understand that a high value of this ratio indicates that the management can achieve growth in sales without making additional investments in fixed assets.

Likewise, operating assets ratio equals the operating assets divided by total assets. This is calculated on percentage basis. The ratio indicates what part of total assets is being used for generating revenues. Gain on operating assets is calculated by dividing net income by operating assets. This is also calculated on percentage basis.  ‘Accounting-tools’ website recommends that gross values of these ratios should be used as some kinds of increased depreciation may distort the book value.

Considerations

The choice of operating is often a matter of personal preferences. It is not unusual to have disagreement as to which items should be excluded from operating assets. Also, different ratios signify different features for different companies. An example is that of an IT industry, which doesn’t rely heavily on assets. In such cases, asset ratios may not be applicable. Yet, these ratios are significant in case of telecom or construction companies as they have substantial investments in assets.

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