Also known as big-ticket items, fixed assets are the money-making gears of a company’s financial makeup. They’re long-term, can be intangible or intangible, and can be physical or non-physical. At the accounting level, they’re loaded onto the balance sheet upon delivery. Over the course of their lives, fixed assets are recorded on the income statement as depreciation expenses and/or gains (losses) on sale.
Fixed assets are not the same as total assets.
Succinctly, the difference between fixed assets and total assets is that total assets are the sum of fixed and current assets. While fixed assets usually constitute a majority of total assets (roughly 55%) in a healthy stable company, they are not the same thing.
What is a fixed asset?
Fixed assets are expensive items that a company needs in order to produce its goods or services. They are synonymous with long-term and non-current assets.
To be defined as “fixed,” an asset must (1) be used to produce the company’s goods and/or services, but is not the good or service itself, (2) have a useful life of more than 1 year, and (3) be recorded at cost on the balance sheet and depreciated over its useful life on the income statement.
When we say “useful life,” we simply mean the amount of time the asset is expected to do its job. In most cases, accounting governing bodies such as the FASB determine what the useful life is for different kinds of assets. For example, computers are fixed assets that have a useful life of 3 years.
Total Assets are the Sum of Fixed and Current Assets
Fixed assets are one of two dominant types. The other is current assets, and together they constitute total assets.
Current assets are the opposite of fixed assets. They are either financial rights or physical goods that the company uses directly in the production and delivery of its goods or services. Examples of current assets include inventory, which is sold to make a profit, and accounts receivable, which is cash that customers owe to the company when they make a purchase on credit.
To better illustrate the relationship between fixed assets and total assets, imagine you own a company with $1,000,000 in total assets. Among them is current assets in the amount of $400,000 that consists of cash, accounts receivable, and inventory. The rest is fixed assets in the amount of $600,000 that consists of machines and patents.
Healthy Ratio of Fixed Assets to Total Assets
Based on data from 20 top performing US companies such as Amazon, Walmart, and AT&T, a healthy ratio of fixed assets to total assets is 55% on average, although values range from 24% in pharmaceuticals to 90% in telecommunications.
To determine these values, I collected data from the SEC‘s EDGAR database. The following table shows fixed assets, total assets, and fixed asset share of total assets, as well as industries and links to their SEC 10k 2020 filings, from 20 high performance stable companies trading on public exchanges in the USA.
| Company | Fixed Assets | Total Assets | Fixed Assets % of Total Assets | Industry | Link |
|---|---|---|---|---|---|
| JP Morgan Chase | $1,246,243 | $3,386,071 | 37% | Bank | Filing |
| Berkshire Hathaway | $308,233 | $873,729 | 35% | Conglomerate | Filing |
| Walmart | $162,429 | $252,496 | 64% | Consumer Goods | Filing |
| Johnson & Johnson | $123,657 | $174,894 | 71% | Consumer Goods | Filing |
| CostCo | $28,610 | $54,918 | 52% | Consumer Goods | Filing |
| The Home Depot | $42,104 | $70,581 | 60% | Consumer Goods | Filing |
| CVS Health | $56,369 | $230,715 | 24% | Health | Filing |
| UnitedHealth Group | $143,571 | $197,289 | 73% | Health | Filing |
| McKesson Corp | $19,477 | $61,845 | 31% | Health | Filing |
| Cardinal Health | $14,606 | $44,719 | 33% | Health | Filing |
| Exonn Mobile | $287,857 | $332,750 | 87% | Petrol | Filing |
| Chevron | $213,712 | $239,790 | 89% | Petrol | Filing |
| Amazon | $128,914 | $225,248 | 57% | Tech | Filing |
| $83,646 | $159,316 | 53% | Tech | Filing | |
| Apple | $180,175 | $323,888 | 56% | Tech | Filing |
| $123,331 | $275,909 | 45% | Tech | Filing | |
| Microsoft | $130,164 | $304,137 | 43% | Tech | Filing |
| AT&T | $473,753 | $525,761 | 90% | Telecommunications | Filing |
| Ford | $6,950,347 | $18,608,500 | 37% | Vehicles | Filing |
| General Motors | $154,270 | $235,194 | 66% | Vehicles | Filing |
As you can see, the “healthy” ratio for fixed assets to total assets varies slightly from industry to industry. Tech companies such as Microsoft and Apple tend to hover around the 55% average, while consumer goods companies lean towards 60% and oil and gas companies are in the high 80% range.
Nevertheless, it’s clear that in the vast majority of companies, fixed assets constitute the majority of total assets. Consequently, current assets constitute the minority.
Example of Fixed Assets
Fixed assets can represent a multitude of objects. Examples include loans, buildings, land, machines, software systems, copyrights, patents, factories, storefronts, trade secrets, customer lists, and goodwill.
Types of Fixed Assets
As you can see from the above list, the word “fixed” should not be taken literally. Fixed implies physical and tangible assets, but not all fixed assets are physical. For clarity’s sake, you should always think of fixed assets as a synonym of long-term assets.
Any asset, physical or not, is fixed as long as it (1) is used to produce the company’s goods and/or services, but is not the good or service itself, (2) has a useful life of more than 1 year, and (3) is recorded at cost on the balance sheet and depreciated over its useful life on the income statement.
Corporate Asset Classification & Behavior Table: Fixed Assets
Below is an asset classification table. It shows common asset names and whether they can be considered fixed, not fixed, or either fixed or not fixed on the balance sheet. It also shows how these items “behave” on the income statement.
| Common Asset Names | Fixed Nature | Behavior on Income Statement |
|---|---|---|
| Fixed | Fixed | Depreciation Expense, Gain (Loss) on sale |
| Goodwill | Fixed | Expensed ONLY if impaired, else none |
| Land | Fixed | None |
| Long term | Fixed | Depreciation Expense, Gain (Loss) on sale |
| Marketable securities (>1yr) | Fixed | Interest Income, Gain (Loss) on sale |
| Non-current | Fixed | Depreciation Expense, Gain (Loss) on sale |
| Property Plants & Equipment | Fixed | Depreciation Expense (except Land), Gain (Loss) on sale |
| Rolling stock | Fixed | Depreciation Expense, Cost of Sales, Gain (Loss) on sale |
| Deferred expenses | Fixed or Not Fixed | Cost of Sales, Operating Expense |
| Physical | Fixed or Not Fixed | Depreciation Expense, Cost of Sales, Operating Expense, Gain (Loss) on sale |
| Prepaid expenses | Fixed or Not Fixed | Operating Expense |
| Tangible | Fixed or Not Fixed | Depreciation Expense, Cost of Sales, Operating Expense, Gain (Loss) on sale |
| Accounts receivable | Not Fixed | Revenue |
| Cash | Not Fixed | None |
| Current | Not Fixed | Revenue, Cost of Sales, Gain (Loss) on Sale |
| Inventory | Not Fixed | Cost of Sales |
| Marketable securities (<1yr) | Not Fixed | Interest Income, Gain (Loss) on sale |
| Short term | Not Fixed | Revenue, Cost of Sales, Gain (Loss) on Sale |
As you can see, nearly all fixed assets are depreciated on the income statement and are recorded as a gain (loss) upon selling them. The two exceptions to this rule are land and goodwill. Land never looses value, because it doesn’t get “used up” over time.
Goodwill, likewise, is not a usable asset. Instead, it represents the difference between fair value and book value of asset purchased by the company. Since the surplus, in theory, should lead to value creation in the operations of the company, it doesn’t make sense to amortize it as an expense.
In addition, you will note that marketable securities that generate interest over time show this interest on the income statement. Finally, rolling stock (vehicles), can be considered a type of long-term inventory in very rare cases. They would, thus, appear as cost of sales on the income statement.
Deferred Expenses, Physical Assets, Prepaid Expenses, and Tangible Assets: Fixed or Not Fixed
In the table, you’ll notice there are four common asset names that can be considered fixed or not fixed: deferred expenses, physical assets, prepaid expenses, and tangible assets. The reason is that these names represent items that can be held more or less than one year, and can be either directly expensed or depreciated on the income statement. Let’s look at them one by one, as they’re important to understand in the framework of total assets.
Deferred expenses are expenses that we have paid for but not yet incurred. For example, imagine you have an attorney on retainer. You pay a monthly fee in order to have direct access to his/her services, but if he/she does no work, you could have a deferred expense for a predefined period.
Usually, there is a termination period for retainer deferred expenses, which means that even if you don’t incur services, you know you will expense the retainers to the income statement. If that period is more than one year, you would consider these expenses a fixed asset and need to take a different approach by depreciating them over time. However, if you expense them monthly, then these are current assets. Deferred expenses can thus be fixed or not fixed.
Physical assets is a name that simply designates assets that are physical in nature. Cash and buildings are both physical, but one is current and the other is fixed. Physical assets can thus be fixed or not fixed.
Prepaid expenses are items that we pay for in advance, knowing exactly how they will be used. The most common example is insurance. We pay a premium for insurance coverage over a period, and we adjust the balance sheet account as we expense it on the income statement. If the period in which prepaid expenses are valid exceeds 1 year, they are fixed assets. In the opposite, they’re current assets.
Tangible assets is another name we give to physical assets. Like physical assets, they can be fixed or not fixed. An example of fixed tangible assets is machinery, and one of not fixed tangibles is cash.
Conclusion
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