Distinguish between fixed assets and current assets.

Fixed assets and current assets are two categories of assets on a company's balance sheet, each serving different purposes and characteristics:

1. Fixed Assets:

   • Definition: Fixed assets, also known as long-term assets or non-current assets, are resources that a company owns and uses for its operations over an extended period, typically more than one accounting period (usually a year). These assets are not intended for immediate sale and are expected to provide benefits to the company for multiple years.

   • Examples: Fixed assets include property, plant, and equipment (PP&E) such as buildings, machinery, vehicles, furniture, and land. Intangible assets like patents, copyrights, trademarks, and goodwill also fall under this category.

   • Characteristics:

     • Fixed assets are not easily converted into cash and usually require a significant time and effort to sell.
     • They are subject to depreciation or amortization to reflect their gradual consumption or decline in value over time.
     • Fixed assets contribute to a company's production or service delivery capabilities and are essential for generating revenue.
     • They are recorded at historical cost on the balance sheet and may be periodically adjusted for depreciation or impairment.

2. Current Assets:

   • Definition: Current assets are assets that are expected to be converted into cash or used up within one year or the normal operating cycle of the business, whichever is longer. These assets are readily convertible into cash and are essential for the day-to-day operations of the company.

   • Examples: Current assets include cash and cash equivalents, short-term investments, accounts receivable, inventory, and prepaid expenses.

   • Characteristics:

     • Current assets are highly liquid and can be easily converted into cash to meet short-term obligations or fund ongoing operations.
     • They fluctuate in value over time based on changes in business activities and economic conditions.
     • Current assets provide insight into a company's short-term liquidity and ability to meet its immediate financial obligations.
     • They are reported on the balance sheet in the order of liquidity, with the most liquid assets listed first.

In summary, fixed assets represent long-term investments in productive resources, while current assets consist of assets that are expected to be converted into cash or consumed within a relatively short time frame. Understanding the distinction between these two asset categories is essential for assessing a company's financial position and performance.