FIXED ASSET ANALYSIS



Fixed assets refer to physical or tangible things of value a company owns such as facilities, equipment, and land. The term "fixed assets" reflects the traditional notion that these kinds of assets are fixed and do not require much consideration after they are purchased. Contemporary accounting literature, however, now calls fixed assets "property, plant, and equipment" for the most part. Companies rely on their assets, including fixed assets, to generate profits. Modern equipment in good repair, for example, is essential for high productivity and efficiency, and hence for profits. Fixed asset analysis involves calculating the earnings potential, use, and useful life of fixed assets. In addition, fixed asset analysis determines if fixed assets are sufficiently maintained to ensure current and future earning power as well as the relative profitability contributed by fixed assets and fixed asset acquisitions.

A decrease in operational efficiency and productivity results from the improper or inadequate maintenance of malfunctioning and inefficient assets as well as from the failure to replace obsolete and irreparable assets. Asset analysis examines the age and condition of each major asset category, as well as the costs of replacing old assets to determine the output levels, downtime, and temporary discontinuances. The measure of efficiency involves the calculation of these ratio:

To present the state of or the changes in various plant and equipment assets, accountants often prepare financial statements and schedules that plot out this information. These statements include the dispositions of company property, plant, and equipment as well as the acquisitions and divestitures of fixed assets. In preparation of these reports, accountants generally determine the age and condition of the major fixed assets and the replacement cost of them. Technology companies in particular benefit from examining this information. Accountants also compute the different ratios listed above and compare them with the industry averages to see how their companies use their fixed assets in relation to their competitors. In addition, accountants make note of assets that are no longer being used as well as those that are not productive. Companies using specialized equipment—such as those manufacturing specialized or trendy items—especially need to keep track of their fixed asset to avoid obsolescence.

Fixed asset analysis also may involve having accountants determine the hours or mileage of usage for various assets and produce reports that indicate hours of usage per month for buildings and equipment and the mileage of usage per month for vehicles. Such reports enable efficient comparison and help managers identify underused assets. Armed with this information, managers can decide whether to reallocate, sell, or otherwise use or dispose of fixed assets with low usage.

Companies benefit from fixed asset analysis by taking control of their fixed assets and maintaining their condition in order to ensure proper operation. Controlling fixed assets allows companies to avoid losses associated with misused and misplaced assets as well as with deterioration. In addition, fixed asset analysis enables companies to maximize the use of property, plant, and equipment.

DEPRECIATION

Depreciation is a key concept accountants use when analyzing fixed assets and the examination of depreciation helps to clarify the useful life of assets. Depreciation refers to the decreasing potential of fixed assets to generate revenues over their useful life, resulting from deterioration and obsolescence. In addition, depreciation involves accountants spreading the total cost of fixed assets out over their useful life. Again, the comparison of the depreciation rate to the industry average will underscore the findings of the repairs and maintenance ratios.

To determine the adequacy of the depreciation charge, do the following:

  1. Calculate the trend in depreciation expenses to fixed assets.
  2. Determine the trend in depreciation expenses to sales.
  3. Compare the book depreciation to tax depreciation.

If the trends are declining, depreciation charges may be inadequate. If sales are decreasing as asset expenditures are increasing, the company may be overexpanding and lifting its bottom line through large write-offs rather than operating margins. Unwarranted changes in the lives or salvage values of fixed assets will increase depreciation expenses, and thus overstate earnings.

[ Roger J. AbiNader ,

updated by Karl Heil ]

FURTHER READING:

Meigs, Robert F., and Walter B. Meigs. Accounting: The Basis for Business Decisions. 11 th ed. New York: McGraw-Hill, 1998.

Peterson, Raymond H. Accounting for Fixed Assets. New York: Wiley, 1994.

Siegel, Joel G., and Jae K. Shim. Accounting Handbook. Hauppauge, NY: Barron's Educational Series, 1995.



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