A:

Current assets and fixed assets are listed on the balance sheet. The balance sheet shows a company's resources or assets while also showing how those assets are financed whether through debt as shown under liabilities or through issuing equity as shown in shareholder's equity. Current assets are short-term assets, whereas fixed assets are typically long-term assets. However, there are other differences between them.  

Current assets are assets that can be converted into cash within one fiscal year or one operating cycle. Current assets are used to facilitate day-to-day operational expenses and investments. As a result, short-term assets are liquid meaning they can be readily converted into cash.

Examples of current assets include:

Fixed assets are noncurrent assets that a company uses in its production or goods and services that have a life of more than one year. Fixed assets are recorded on the balance sheet and listed as property, plant, and equipment (PP&E). Fixed assets are long-term assets and are referred to as tangible assets, meaning they can be physically touched. 

Examples of fixed assets include: 

  • Vehicles like trucks
  • Office furniture
  • Machinery
  • Buildings
  • Land

Key Differences Between Fixed Assets and Current Assets 

Fixed assets undergo depreciation, which divides a company's cost for non-current assets to expense them over their useful lives. Depreciation helps a company avoid a major loss when a company makes a fixed asset purchase by spreading the cost out over many years. Current assets are not depreciated because of their short-term life.

Noncurrent assets (like fixed assets) cannot be liquidated readily to cash to meet short-term operational expenses or investments.

Fixed assets have a useful life of over one year, while current assets are expected to be liquidated within one fiscal year or one operating cycle.

Capital Investment Decisions for Fixed Assets and Current Assets

Capital investment is money invested in a company with the goal of advancing its commercial objectives.

Capital Investment and Fixed Assets

Capital investment decisions are long-term funding decisions that involve capital assets such as fixed assets. Capital investments can come from many sources, including angel investors, banks, equity investors, and venture capital. Capital investment might include purchases of equipment and machinery or a new manufacturing plant to expand a business. In short, capital investment for fixed assets means the company plans to use the assets for several years.

Capital Investment and Current Assets

Although capital investment is typically used for long-term assets, some companies use it to finance working capital. Current asset capital investment decisions are short-term funding decisions essential to a firm’s day-to-day operations. Current assets are essential to the ongoing operation of a company to ensure it covers recurring expenses. 

Capital investment decisions look at many components, such as project cash flows, incremental cash flows, pro forma financial statements, operating cash flow, and asset replacement. The objective is to find the investment that yields the highest return while ignoring any sunk costs.

Return on investment capital (ROIC) is a calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. Return on invested capital gives a sense of how well a company is using its money to generate returns.

There are several methods used in determining how to allocate capital to one investment versus another, including incremental analysis whereby a company can calculate the differences in cost between different investment options.

The Bottom Line 

Current assets are short-term assets that are typically used up in less than one year. Current assets are used in the day-to-day operations of a business to keep it running. 

Fixed assets are long-term, physical assets such as plant and equipment. Fixed assets have a useful life of more than one year.

Knowing where a company is allocating its capital and how it finances those investments is critical information before making an investment decision. A company might be allocating capital to current assets, meaning they need short-term cash. Or the company could be expanding its market share by investing in long-term fixed assets. It's also important to know how the company plans to raise the capital for their projects, whether the money comes from a new issuance of equity, or financing from banks or private equity firms.

RELATED FAQS
  1. What is the difference between current and noncurrent assets?

    Learn about current assets and noncurrent assets, the differences between these types of assets, and some examples of current ... Read Answer >>
  2. The difference between fixed and current assets

    Learn the differences between fixed assets such as land and current assets such as cash, and how these types of assets appear ... Read Answer >>
  3. How do current assets and noncurrent assets differ?

    Current assets are short-term assets, while noncurrent assets are long-term assets; both are listed on a company's balance ... Read Answer >>
  4. What are some examples of fixed assets?

    Fixed assets are assets that have a useful life of more than one year. Fixed assets include property, plant, and equipment ... Read Answer >>
  5. Are stocks real assets?

    Learn why stocks are classified as financial assets, not real assets. Understand the properties that determine whether an ... Read Answer >>
Related Articles
  1. Managing Wealth

    Comparing Tangible and Intangible Assets

    Tangible assets are physical assets such as land, vehicles or equipment.
  2. Investing

    How to Analyze a Company's Financial Position

    Find out how to calculate important ratios and compare them to market value.
  3. Investing

    Financial Analysis: Solvency vs. Liquidity Ratios

    Solvency and liquidity are equally important for a company's financial health.
  4. Investing

    Asset Turnover Ratio

    Investopedia explains: The asset turnover ratio is a measure of a company's ability to use its assets to generate sales or revenue, and is a calculation of the amount of sales or revenue generated ...
  5. Investing

    Liquid & Illiquid Assets

    The easier it is to convert the asset, the more liquid the asset is considered.
  6. Investing

    Reviewing Liabilities On The Balance Sheet

    As an experienced or new analyst, liabilities tell a deep story of how a company finances, plans and accounts for money it will need to pay at a future date.
  7. Investing

    Advantages of Maintaining Low Working Capital

    Understand the benefits and advantages of maintaining low working capital as related to liquidity needs, capital allocation and operational efficiency.
  8. Investing

    Diversification: It's All About (Asset) Class

    Frustrated stock pickers rejoice - asset class selection is simpler and safer.
  9. Investing

    How To Read Apple's Balance Sheet

    We explain how to find, read, and analyze a balance sheet from Apple.
RELATED TERMS
  1. Business Asset

    A piece of property or equipment purchased exclusively or primarily ...
  2. Long-Term Assets

    1. The value of a company's property, equipment and other capital ...
  3. Tangible Asset

    A tangible asset is an asset that has a physical form, and includes ...
  4. Replacement Cost

    The cost to replace the assets of a company or a property of ...
  5. Active Asset

    An active asset can be a tangible or intangible asset used by ...
  6. Asset Base

    Asset base refers to the underlying assets giving value to a ...
Hot Definitions
  1. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  2. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  3. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  4. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  5. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  6. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
Trading Center