Fixed assets definition: Fixed assets are the long-term tangible assets that are used by business in

generating income. Fixed assets provide the firm with long term financial gain as they have a useful life of more than one
year. Fixed assets are also known as capital assets and are denoted by the term Property, Plant and Equipment in the
balance sheet. Fixed assets cannot be easily converted into cash.
Types of Fixed Assets
1. Tangible Assets: Tangible asset is an asset that has a physical existence. Tangible assets examples are land,
buildings and machinery.
2. Intangible Assets: An intangible asset is an asset which doesn’t possess a physical existence. Brand recognition,
intellectual property, goodwill and such as copyrights, trademarks, and patents are all examples of intangible
assets.
Fixed Asset Formula:- Net Fixed Assets = Total Fixed Assets – Accumulated Depreciation
Accounting for Fixed Asset
Accounting for fixed assets involve recording of several transactions for fixed assets which can be as follows:

1. Recording of asset : This is the first type of accounting entry for the purchase of the asset. In case the asset is
purchased with credit, then the entry will be a credit to the account payable and debit will be on the respective
fixed asset account.
2. Depreciation: Fixed assets undergo depreciation with time in accounting. Several methods are used to
determine depreciation. Of the methods, straight line method is the most popular method.
3. An asset based upon it’s useful life will function in the organisation. After that period it must be scrapped or sold.
It is performed by debiting the accumulated depreciation account of all depreciation charges and crediting the
respective fixed asset account.
Depreciation in Fixed Assets
Depreciation is the part of a fixed asset’s cost listed as an investment during the present accounting years. In other
words, a fixed asset has a valuable long life for more than one accounting period, therefore, depreciation refers to the
fraction of its value used during the current years.
Depreciation can be measured in various ways. Simplest is the Straight-line depreciation, separating the fixed asset’s cost
by the number of accounting years it is expected to last.
Fixed Assets Examples
Fixed assets are fixed in nature and cannot be easily convertible into cash. Below is the list of fixed assets.

 PPE (Property, Plant, and Equipment)

 Land
 Buildings
 Vehicles
 Furniture
 Machinery
The objectives of a fixed assets accounting system are to:
1. Record all fixed assets: The system should maintain a comprehensive inventory of all fixed assets owned by the
organization, including buildings, equipment, vehicles, and land.
2. Track asset values: The system should keep track of the original cost of each asset, as well as any subsequent
costs incurred for repairs, maintenance, and upgrades.
3. Calculate depreciation: The system should calculate the amount of depreciation for each asset, which represents
the decrease in value over time due to wear and tear, obsolescence, or other factors.
4. Monitor asset locations: The system should track the physical location of each asset, as well as any changes in
ownership or custody.
5. Facilitate financial reporting: The system should provide accurate and up-to-date information on the value,
depreciation, and location of fixed assets, which is necessary for financial reporting and compliance with
accounting standards.
6. Support decision-making: The system should provide useful data and reports that can help management make
informed decisions about asset management, maintenance, and replacement.
Factors Affecting Depreciation:
1. Cost of the Asset: The cost of a fixed asset is determined by adding all the expenses incurred on bringing the asset
to usable condition with the purchasing price of that asset. If the cost of the asset is more, the depreciation charged on
that asset will also be higher. For example, the company purchased an asset for ₹50,000 and also spend ₹10,000 on its
installation. In this case, the cost price to be shown in the books will be 50,000 +10,000 = ₹60,000, and depreciation will
be calculated at ₹60,000.
2. Estimated Useful Life: The number of years for which an asset can be effectively used in the business is
called its estimated useful life. A machine having more number of useful years will have less yearly depreciation as
compared to a machine that has a lesser number of useful years.
3. Estimated Scrap Value: Scrap value is the net realisable value of an asset at the end of its effective life. It is also
known as residual value or break-up value. It is deducted from the total cost of the asset at the time of calculating
depreciation.
For example, in 2020, a company purchased a machine for ₹1,00,000. At the time of purchase, the scrap value of the
machine was estimated at ₹10,000 at the end of 3 years of use. So depreciation is calculated as:
1,00,000- 10,000 = 90,000 90,000/3= 30,000
Therefore, the annual depreciation on that machinery will be ₹30,000.
A company is free to make use of the most appropriate depreciation method for its business operations. Accounting
theory suggests that companies should make use of a depreciation method that closely reflects the company’s’ economic
circumstances. Thus, companies can choose a method that allocates the asset cost to accounting periods according to
benefits received from the use of the asset.
Most companies use the straight-line method for financial reporting purposes, but they may also use different methods
for different assets. The most important criteria to follow is to Use a depreciation method that allocates asset cost to
accounting periods in a systematic and rational manner.
Selection of a Depreciation Method:
1. Legal Provisions: The statute governing an enterprise may the basis for computation of depreciation. In India, in
the case of company, the Companies Act, 1956, provides that the provision of depreciation, unless permission to the
contrary is obtained from the central government, should either be based on reducing balance method at the rate
specified in the Income-Tax Act/Rules or on the corresponding straight-line depreciation rates which would write off 95
per cent of the original cost over the specified period.
Where the management’s estimate of the useful life of an asset of the enterprise is shorter than that envisaged under
the provision of the relevant statute, the depreciation provision is appropriately computed by applying a higher rate. If
the management’s estimate of the useful life of the asset is longer than that envisaged under the statute, depreciation
rate lower than that envisaged by the statute can be applied only in accordance with the requirements of the statue.
2. Financial Reporting: The goal in financial reporting for long-life assets is to seek a statement of
income that realistically measures the expiration of those assets. The only difficulty is that no one knows, in any
satisfactory sense, just what portion of the service potential of a long- life asset expires in any one period. All that can be
said is that financial statements should report depreciation charges based on reasonable estimates of assets’ expiration
so that the goal of fair presentation can more nearly be achieved.
3. Effect on Managerial Decision: The suitability of a depreciation method should not be argued only on the basis
of correct portrayal of the objective facts but should also be decided in terms of their various managerial effects.
Depreciation and its financing effect take the less basic but still realistic approach that, regardless of any effect which
depreciation may have upon the total revenue stream, the recognition of depreciation either through the cost of product
or as an element in administration and marketing expenses, does cut down the showing of net income available for
dividends, and thus, restricts the outflow of cash.
4. Inflation: Depreciation is a process to account for decline in the value of assets and for this many methods such as
straight line, different accelerated methods are available. In recent years, inflation has been a major consideration in
selecting a method of depreciation.
To take an example, suppose one bought a car for Rs. 10,00,000 five years ago and wrote off Rs. 2,00,000 every year to
account for depreciation using straight-line method, expecting that a new car can be purchased after five years. However,
five years later, it is found that the same car costs Rs. 15, 00,000 whereas only Rs. 10, 00,000 has been saved through
depreciation.
5. Technology: Depreciation is vital because it decides the regenerating capacity of industry and enables
enterprises to set aside an amount before submitting profits to taxation, for replacing machines. Realistically, the
depreciation that enterprises are eligible for and capable of accumulating should cover the purchase price of assets,
when the time comes for replacement.
6. Capital Maintenance: During inflation, depreciation, if based on historic cost of assets, helps a business
firm to gather an amount equivalent to the historical cost of the asset less its salvage value. This treatment of
depreciation facilities in maintaining only the ‘money capital’ or financial capital of business enterprises. However, this
results into matching between historic amount of depreciation and sales in current Rupees.
The result is that reported net income is overstated and dividends is distributed from the net income which is not real
but fictitious. This way of income measurement and maintaining only financial capital during inflation, results into
erosion of real capital of business enterprises.
What Is Financial Statement Analysis?
Financial statement analysis is the process of analyzing a company’s financial statements for decision-making purposes.
External stakeholders use it to understand the overall health of an organization and to evaluate financial performance
and business value. Internal constituents use it as a monitoring tool for managing the finances.
The financial statements of a company record important financial data on every aspect of a business’s activities. As such,
they can be evaluated on the basis of past, current, and projected performance.
In general, financial statements are centered around generally accepted accounting principles (GAAP) in the United
States. These principles require a company to create and maintain three main financial statements: the balance sheet,
the income statement, and the cash flow statement. Public companies have stricter standards for financial statement
reporting. Public companies must follow GAAP, which requires accrual accounting.
Private companies have greater flexibility in their financial statement preparation and have the option to use either
accrual or cash accounting. Several techniques are commonly used as part of financial statement analysis. Three of the
most important techniques are horizontal analysis, vertical analysis, and ratio analysis. Horizontal analysis compares data
horizontally, by analyzing values of line items across two or more years. Vertical analysis looks at the vertical effects that
line items have on other parts of the business and the business’s proportions. Ratio analysis uses important ratio metrics
to calculate statistical relationships.
Types of Financial Statements
1. Balance Sheet: The balance sheet is a report of a company’s financial worth in terms of book value. It is
broken into three parts to include a company’s assets, liabilities, and shareholder equity. Short-term assets such
as cash and accounts receivable can tell a lot about a company’s operational efficiency; liabilities include the
company’s expense arrangements and the debt capital it is paying off; and shareholder equity includes details on
equity capital investments and retained earnings from periodic net income. The balance sheet must balance
assets and liabilities to equal shareholder equity. This figure is considered a company’s book value and serves as
an important performance metric that increases or decreases with the financial activities of a company.
2. Income Statement: The income statement breaks down the revenue that a company earns against the
expenses involved in its business to provide a bottom line, meaning the net profit or loss. The income statement
is broken into three parts that help to analyze business efficiency at three different points. It begins with revenue
and the direct costs associated with revenue to identify gross profit. It then moves to operating profit, which
subtracts indirect expenses like marketing costs, general costs, and depreciation. Finally, after deducting interest
and taxes, the net income is reached.
3. Cash Flow Statement:The cash flow statement provides an overview of the company’s cash flows from
operating activities, investing activities, and financing activities. Net income is carried over to the cash flow
statement, where it is included as the top line item for operating activities. Like its title, investing activities
include cash flows involved with firm-wide investments. The financing activities section includes cash flow from
both debt and equity financing. The bottom line shows how much cash a company has available.
4. Free Cash Flow and Other Valuation Statements: Companies and analysts also use free cash flow
statements and other valuation statements to analyze the value of a company. Free cash flow statements arrive
at a net present value by discounting the free cash flow that a company is estimated to generate over time.
Private companies may keep a valuation statement as they progress toward potentially going public.
What Is Ratio Analysis?
Ratio analysis is a quantitative method of gaining insight into a company's liquidity, operational efficiency, and
profitability by studying its financial statements such as the balance sheet and income statement. Ratio analysis is a
cornerstone of fundamental equity analysis.
Types of Ratio Analysis
The various kinds of financial ratios available may be broadly grouped into the following six silos, based on the sets of
data they provide:
1. Liquidity Ratios: Liquidity ratios measure a company's ability to pay off its short-term debts as they become due,
using the company's current or quick assets. Liquidity ratios include the current ratio, quick ratio, and working capital
ratio.
2. Solvency Ratios: Also called financial leverage ratios, solvency ratios compare a company's debt levels with its
assets, equity, and earnings, to evaluate the likelihood of a company staying afloat over the long haul, by paying off its
long-term debt as well as the interest on its debt. Examples of solvency ratios include: debt-equity ratios, debt-assets
ratios, and interest coverage ratios.
3. Profitability Ratios: These ratios convey how well a company can generate profits from its operations. Profit margin,
return on assets, return on equity, return on capital employed, and gross margin ratios are all examples of profitability
ratios.
4. Efficiency Ratios: Also called activity ratios, efficiency ratios evaluate how efficiently a company uses its assets and
liabilities to generate sales and maximize profits. Key efficiency ratios include: turnover ratio, inventory turnover, and
days' sales in inventory.
5. Coverage Ratios: Coverage ratios measure a company's ability to make the interest payments and other
obligations associated with its debts. Examples include the times interest earned ratio and the debt-service coverage
ratio.
6. Market Prospect Ratios: These are the most commonly used ratios in fundamental analysis. They
include dividend yield, P/E ratio, earnings per share (EPS), and dividend payout ratio. Investors use these metrics to
predict earnings and future performance.
What Is Fund Flow?
Fund flow is the cash that flows into and out of various financial assets for specific periods of time. It's usually measured
on a monthly or quarterly basis.
Fund flow doesn't measure the performance of any single asset but emphasizes how cash is moving. For example, with
mutual funds, fund flow measures the cash involved in share purchases or inflows and the cash resulting from share
redemptions or outflows. It doesn't say anything about how well or badly a fund performed.
Net inflow occurs when more cash flows into, say, the mutual fund than out of it. A net inflow creates excess cash for
managers to invest. Theoretically, this then creates demand for securities such as stocks and bonds. A net outflow would
indicate that more cash was taken from the mutual fund than was invested in it.
On the accounting side, the fund flow statement was required by GAAP between 1971 and 1987. When it was required,
the statement of fund flow was primarily used by accountants to report any change in a company's net working capital,
or the difference between assets and liabilities, during a set period of time. Much of this information is now captured in
the statement of cash flow.
For investment purposes, the fund flow does not give the cash position of a company; if a company wanted to do that, it
would prepare its cash flow statement. The fund flow highlights the movement of cash only—that is, it reflects the net
movement after examining inflows and outflows of monetary funds. It will also identify any activity that might be out of
character for the company, such as an irregular expense. The use of the fund flow statement in investing is more useful
today. Investor sentiment can be gauged as it relates to different asset classes. For example, if the flow of funds for
equities is positive, it suggests investors have a generally optimistic view of the economy—or at least the short-term
profitability of listed companies.
Objectives of Fund Flow Statement
1. Helps in knowing the changes in the company’s financial position: The main aim of preparing a
fund flow statement is to cite the reasons for changes in the liabilities, assets, or equity capital. It is done by
comparing the two balance sheets for different accounting periods.
 2. Analyzing the operational position of the company: The balance sheet gives a static view of the
company’s financial position. It is only an overview of the current position of the company at any particular date
so a thorough review of the movement of funds is essential for better financial planning.
3. Helps in proper allocating of the resources: Fund flow statement helps in providing information regarding
the allocating of the resources more efficiently and effectively. It also gives information regarding external and
internal sources of financing.
4. To evaluate the financial withstanding of the company: The external and internal users of the financial
statement require fund flow statements to assess the company’s strengths and weaknesses.
5. Fund flow statement acts as a future guide: Fund flow statement reflects all details regarding the historical
changes that have taken place in the company’s working capital and net assets in a particular accounting period.
This in turn serves as a guide to make financial decisions to achieve the goals of the organization.
What Is A Cash Flow Statement?
A cash flow statement is a type of financial statement that presents total information on all cash inflows a business
makes from ongoing activities and outside sources. It also includes any cash outflows made within a specific time period
to cover investments and business expenses.
The financial statements of a firm give investors and analysts a picture of all the business transactions that take place,
where each transaction helps the company succeed. Because it tracks how much money the company makes through
operations, investments, and borrowing, the cash flow statement is seen to be the most understandable of all the
financial statements. Net cash flow is the total of these three components.
Cash Flow Statement Format?
Understand the cash flow statement format is essential as an organization’s total cash inflows from current activities and
outside investment sources are detailed in a cash flow statement. The cash made by the company from operations,
investments, and financing is included in the cash flow statement. This total is known as net cash flow. Cash flow from
operations, which comprises transactions from all operational business activities, is the first section of the cash flow
statement. Investment gains and losses are reflected in the second area of the cash flow statement, which is the cash
flow from investments. The final section, which summarizes the cash used from loan and equity, is cash flow from
finance.
The accounting industry is aware that reading only one or two financial statements is insufficient to fully comprehend the
finances and operations of a firm. As a result, the statement of cash flows must be included in a set of financial
statements that are distributed outside of a corporation in accordance with widely accepted accounting standards
(GAAP, US GAAP). Five financial statements and their accompanying notes make up a full set of financial statements:
1. income declaration
2. Comprehensive income statement
3. sheet of balances
4. Equity statement of stockholders
5. Cash flow statement
6. Financial statements’ notes
After understanding cash flow statement format, we know accounting has two distinct subfields: accrual and cash. Since
accrual accounting is used by the majority of public firms, the cash position of the business is not reflected in the income
statement. However, the cash flow statement is concentrated on cash accounting.