Difference between Inventory and Fixed Assets

Inventory

Inventory refers to the actual raw materials that are used in the production of goods as well as the final goods produced that will be sold in the market. A company’s total inventory represents a very important asset, simply because its turnover is among the primary sources for revenue generation, as well as subsequent earnings for the organisation and its shareholders. There are mainly three types of inventory: raw material, work-in-progress goods, and finished goods. Inventory is categorised as a part of the current assets in the balance sheet of a company.

Inventory is one of the most crucial assets for any company. No company can function properly if they do not keep proper track of their inventory and its actual value.

Fixed Assets

Fixed assets are defined as the long-term as well as tangible assets of a company that will get used within the operations of a company. These assets help in providing a long lasting financial benefit for the firm. These assets generally have a useful life of greater than one year and they also help a business in generating revenue. Investors mainly look at these assets, and assess their role within a firm when they decide on putting money in a particular organisation. They also check things like fixed asset turnover ratio, to help determine if these assets can generate regular income for the company.

Businesses that are able to efficiently use their fixed assets have a competitive advantage in the market. Another reason why companies must give greater attention to the upkeep, as well as maintenance of fixed assets, is that they heavily impact a company’s overall evaluation. Some examples of fixed assets are as follows:

  • Land
  • Machinery
  • Buildings and facilities
  • Vehicles
  • Furniture
  • Computer equipment

Difference between Inventory and Fixed Assets

The main areas of difference between inventory and fixed assets are as follows:

Inventory

Fixed Assets

Definition

Inventory refers to the actual raw materials that are used in the production of goods, as well as the final goods produced by the company that are available for selling in the market. These assets generally have a useful life of less than a year, and they help a business in generating revenue.

Fixed assets are the tangible assets that get used specifically within the operations of a firm. and help the company in providing long term financial benefits. These assets generally have a useful life of more than a year and they help a business in generating revenue.

Convertibility to cash

It is relatively easier to convert inventory to cash compared to fixed assets.

It is relatively difficult to convert fixed assets to cash compared to inventory.

Valuation

Inventory is valued by adding the cost of raw materials, the production and overhead costs, as well as the profit margins.

Fixed Assets are valued by subtracting the depreciation amount (if applicable) from its cost.

Financing

To purchase inventory, a firm often opts for short term financing via existing funds/borrowing.

To purchase a fixed asset, a firm opts for long term financing through existing funds/borrowing.

Holding period

The holding period for a fixed asset is generally less than a year.

The holding period for a fixed asset is more than a year.

Revaluation Reserve

There is no revaluation reserve created for inventory in the event of its appreciation in price.

There is a revaluation reserve created for a fixed asset in the event of its appreciation in price.

Examples

Some of the examples of Inventory are as follows:

  • Raw materials
  • Finished goods ready for sale
  • Work in progress

Some of the examples of fixed assets are as follows:

  • Land
  • Buildings and facilities
  • Machinery
  • Furniture
  • Vehicles
  • Computer equipment

Conclusion

It is important to note that a firm needs both inventory and fixed assets for running their operations. Both have different functions within a business, and they are valued by investors using different means. Any enterprise needs the right mixture of these two to sustain their business on a long term basis.

Frequently Asked Questions

Which accounting ratio is commonly used vis-a-vis fixed assets?

The most common accounting ratio for fixed assets is the fixed asset ratio.

What are some of the factors that are important for a fixed asset?

Some of the most important factors related to a fixed asset are as follows:

  • They should have a useful life of more than a year
  • They can be depreciated
  • They can be used in business operations and they provide a long term financial benefit

What is the formula for the calculation of Assets in an organisation?

The actual formula for the calculation of assets in an organisation is as follows:

  • Assets = Liabilities + Shareholder’s Equity

What are some of the main features of a fixed asset?

Some of the main features of a fixed asset are as follows:

  • They should have a useful life of more than a year
  • With the exception of land and property, most other fixed assets are liable for depreciation
  • These assets are useful in producing goods and services
  • Fixed assets are a long term financial benefit for any firm in terms of the production of goods
  • It is not easy to convert these assets into cash immediately

What is the total value of fixed assets of a firm if it has the following items: Rs. 40000 for the plant, Rs. 30000 for the machinery, Rs. 5000 for the computer equipment and Rs. 40000 for the building?

The total value of fixed assets is calculated below:
Fixed Assets = Rs. 40000 + Rs. 30000 + Rs. 5000 + Rs. 40000 = Rs. 115000

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