Certain assets should be involved to carry out any business activities. For example, for the production of any product we need to use some equipment, storage or transportation. Today we will talk about the fixed assets, their classification and management.
Fixed asset definition.
A fixed asset of the company is a tangible asset that the company holds in order to manufacture of products or services and useful life which is more than one year.
There is a classification of fixed assets depending on their characteristics and their appointment. All assets are grouped into certain groups.
We can distinguish the following groups of fixed assets of the company:
- Buildings and structures
- Equipment and Machinery
- Tools, equipment and fixtures
- Other fixed assets
Each of these groups consists of individual objects that belong to it.
An initial value is determined when purchasing any of assets. An initial value of the fixed asset is the amount of funds spent on its acquisition or creation. The initial value of an asset comprises costs paying suppliers of asset, funds for its transportation and installation, insurance, and taxes. If the fixed asset is made independently its initial value is equal to the cost of its manufacture.
All assets is credited to the company’s balance sheet by its initial value.
Assets wear out and lose their value during their using. Systematic carrying of value of fixed assets to the cost of manufactured goods and services is called depreciation. Depreciation included to the price of finished products, as we said in the article about the pricing.
Depreciation can be calculated using various methods. Accounting straight-line method is one of the main methods of depreciation calculating. There are also other depreciation calculation methods, such as method of reducing the residual value, the cumulative method, production method and other.
The financial manager should choose the method of depreciation calculation which will be the most advantageous to the company.
In the straight-line method depreciation is calculated using the following formula:
Depreciation for the period = value of the fixed asset that is amortized / asset useful life.
The initial value of the car is 40,000 dollars. Expected asset useful life is 48 months.
Monthly car depreciation will be:
40 000: 48 = 833.33 dollars.
The depreciation of each asset is accumulated in a separate account in accounting.
If the initial value of asset subtract for accumulated depreciation, we will get the residual value of the asset.
In drawing up the balance sheet of the company to some date all fixed assets are recorded at their residual value.
If the asset repaired or improved, its residual value is increased by the amount of money spent on such repairs or improvements.
Fixed assets are deducted from the balance sheet of the company in the event of liquidation, free transfer or sale.
The main tasks of the financial manager in fixed assets management are the following:
- Control of fixed assets transfer to the balance and the determination of their initial value.
- Choice of the method of depreciation, which will be the most profitable in the formation of prices for products and determining of the costs of company.
- Calculation of prices, taking into account depreciation of fixed assets.
- Analysis of the fixed assets efficiency ratios.
- Control of write-off of fixed assets from the balance sheet of the company.
To analyze the efficiency of fixed assets we can use the following analytical indicators:
1) Coefficient of asset depletion.
CAD = AD / IVA x 100%,
AD – Accumulated depreciation of fixed assets.
IVA – Initial value of assets.
This coefficient shows the percent of worn out of fixed assets of the company
2) Productivity of assets.
PA = CP / AVa,
Cp – Cost of production for the period.
AVa – The average fixed assets value, which is defined as – (assets value at the beginning of period + assets value at the end of period) / 2.
This coefficient shows the cost of finished products produced per unit of assets.
3) Assets profitability.
AP= Pp / AVa x 100%,
Pp – profit for the period.
AVa – The average fixed assets value.
This coefficient shows the amount of profit per unit cost of fixed assets.
Performance analysis of fixed assets helps to identify trends of worsening or improving of their use.