A fixed asset is another name for a long-term asset used to generate income, such as land or buildings, through the use of the asset rather than through an outright sale to the customer.
Fixed assets are long term assets that are not expected to be converted into cash during the current or upcoming year. This is also called plant, property, and equipment. In contrast to inventory, cash, or accounts receivable, which are sold to customers or are collected from customers, fixed assets generate the other types of assets. That is, a loom for a linen company is a fixed asset while the fabric made on the loom is inventory which is sold to the customer in exchange for cash or an account receivable (and eventually that's turned into cash, too).
Fixed assets are grown by being purchased with cash raised from operations or financing. The amount spent in this is found in the investing section of the statement of cash flow, part of a company's financial statements.
However, an item that is a fixed asset at one company is not necessarily a fixed asset at another. For instance, that loom is a fixed asset at the linen-making company. But it is inventory at a loom-making company. The latter's fixed assets would include the machinery used to assemble the loom. At a company that sells builds and sells computers and uses computers in its offices, computers can be both a fixed asset (in the office) and inventory for sale. In other words, its the use to which the asset is put that determines whether it is a fixed asset or not and where its worth is placed onto the balance sheet.
Recent Mentions on Fool.com
- Why and How I'm Buying the Downtrodden Gold Miners
- How Big Tobacco Could Affect the Legal Marijuana Business
- Why The Biggest Banks Will Only Keep Getting Bigger
- Are You Ready for an Offshore Drilling Buying Opportunity?
- L-3 Communications to Help DARPA Build Drone-Based Internet System
- Cliffs Natural Resources' Proxy Battle Gets Nasty