Companies initially record fixed assets on their balance sheets for the amount of an asset's purchase cost. Because of inflation and other changing market conditions, the cost of the same asset can change over time. The fixed-asset turnover ratio will appear to be higher for the old company than for the newer firm. But the higher fixed-asset turnover ratio may not necessarily be a better asset or more effective management for the old company.
Initial asset costs are reduced over time by asset depreciation to reflect the decrease in the asset's value. When companies use the fixed-asset turnover ratio for logical comparisons of its own performance, the asset-depreciation factor may destroy the comparative results for different years. The fixed-asset turnover ratio may appear to be higher in later years than in early years, because of the decreased net fixed-asset value as the denominator in the ratio calculation. Therefore, the higher fixed-asset turnover ratio in later years may not indicate that management has improved its performance.
Different companies may have differing accounting policies, which could cause incorrect results when using the fixed-asset turnover ratio in a comparative analysis between companies. For example, a company may adopt an accelerated depreciation policy to charge higher depreciation during an asset's early use, while another company may use the normal straight-line depreciation method to register an average depreciation throughout an asset's life. As a result, the net asset value after depreciation for the first company is mostly lower than that for the second company over the same period. Comparatively, the fixed-asset turnover ratio for the first company is mostly higher than that for the second company, giving a false impression of better management by the first company.
Temporary changes in sales revenue may also lead to an incorrect fixed-asset turnover ratio, which may reduce the use of the ratio in comparative analysis. For example, increase in seasonal sales in one period does not suggest more effective management, even though the fixed-asset turnover ratio is now higher as a result of the increase in revenue from seasonal sales. Companies may see a decrease in their fixed-asset turnover ratios in periods immediately after the seasonal sales. Without taking any seasonal adjustments, a comparative analysis of a company's performance over those periods may incorrectly point at a decrease in management effectiveness.
Fixed Assets calculation
A fixed asset having a useful life of 3 years is purchased on 1 January 2013.Cost of the asset is $2,000 whereas its residual value is expected to be $500.Calculate depreciation expense for the years ending 30 June 2013 and 30 June 2014.
Depreciation expense per annum shall be: ($2000 − $500)/3=$500 p.a.
Depreciation expense for the year ended 30 June 2013: $500 x 6/12 = $250
As $500 calculated above represents the depreciation cost for 12 months, it has been reduced to 6 months equivalent to reflect the number of months the asset was actually available for use.
Depreciation expense for the year ended 30 June 2014: $500 x 12/12 = $500
Similarities between fixed assets and fixed assets in FactsERP
Now the fixed assets module has the following features:-
Multiple Depreciation Methods
Here we can either choose from a huge number of predefined depreciation schedules or we can create our own. Each depreciation method can include different averaging conventions as well recovery periods.
Purchase Order Integration
Integration with the Purchase Order Module can be used for converting purchases into fixed assets without re-entering data. Eligible purchases are automatically displayed to simplify the conversion process.
Tax Benefit Support
This feature provides multiple depreciation books, multiple calendars, special depreciation bonuses, and tax benefit recapture capabilities that can be used for accurate complex tax rules.
Multiple Asset Types
This feature is used to manage multiple property types which includes owned property, leases, rentals, and granted property. It can also track assets that are leased or rented to others.
Multiple Averaging Options
This features can be used for selecting different averaging methods such as full period, mid-period, next period, modified half period, full quarter, full year, full day, and more.
Fixed Asset Tools
Asset manipulation tools can be used for making mass changes to several fixed assets at once. These tools include processing depreciation schedules, releasing fixed asset transactions, converting purchases to fixed assets, and generating fixed asset calendars.
Fixed Asset Classes
This feature is used for creating fixed asset classes to group assets and simplify order entry for commonly used schedules.
Fixed Asset Reporting
The Fixed Asset module provides several fixed assets reports that manages asset acquisitions, disposals, asset balances, asset net values, future projections, and depreciation transactions. If a person wants to review his detailed transactions he can do so by viewing inside the summary report.
The Fixed Assets module provides a complete audit trail of all related transactions. A complete history of all transactions is maintained so the person can view the details of all his entered or imported transactions, including the person who has entered the transaction and the person who has modified the record. The auditing process is simplified by linking notes and supporting electronic documents directly to transactions.