Inventory Vs. Fixed Asset
Experienced investors generally evaluate a company's financial soundness by the size of its assets, also known as economic resources. In the modern marketplace, corporate resources say much more about a firm's standing than temporary ups and downs in the economy. Corporate inventories and fixed assets constitute important resources that companies rely on to thrive and grow.
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Inventory
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Inventories are short-term assets, meaning a company expects to convert them into cash in 12 months or less. This time frame of sale is known as "useful life." A manufacturing company's inventory account indicates raw materials, semi-finished goods and completely finished products. Non-manufacturing and service firms usually have finished goods at their warehouses.
Significance
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Inventory levels are important elements that investors focus on when sifting through a company's financial reports. Financial-market participants always look for clues about corporate management's strategic thinking, especially when it comes to long-term ideas to outmatch the competition. As such, assessing inventory amounts may tell investors which way the wind blows with respect to a firm's future expansion plans.
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Fixed Assets
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A fixed asset is also known as a long-term, tangible or capital resource. Examples include property, plants, equipment and machinery. The useful life of tangible assets is more than one year. Fixed-asset accounting entries involve depreciation, a mechanism that enables companies to allocate the costs of tangible resources over several years.
Importance
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Capital resources play a key role in corporate decision-making mechanisms, indicating to investors where top leadership's priorities lie. Securities-exchange players view companies with substantial fixed-asset amounts as more financially solid.
Connection
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Although fixed assets and inventories are distinct items, corporate executives often review both resources when gauging a company's liquidity levels. Specifically, management takes an in-depth look at both types of assets when reviewing financial indicators, such as working capital and profit margin. Working capital indicates short-term cash availability and equals current assets minus current debts. Profit margin measures revenues-and-expenses trends and equals net income divided by total sales.
Accounting
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To record an inventory purchase, a corporate accountant debits the materials purchases account and credits the cash account. In accounting terminology, crediting cash, an asset account, means reducing liquidity levels. This is different from the banking concepts of "debit" and "credit." To record a fixed asset purchase, the accountant debits the fixed-asset account and credits the vendor-payables account. Year-end depreciation entries debit the depreciation expense account and credit the accumulated depreciation account.
Financial Reporting
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Corporate financial-reporting personnel indicate inventories in the "short-term assets" section of the balance sheet, also known as a statement of financial position or statement of financial condition. Companies record fixed assets as long-term resources in their statements of financial position. Other corporate financial statements include a profit-and-loss report, a statement of cash flows and an equity report.
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References
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