Question

A firm's current assets can be increased as a percentage of sales, but not fixed assets....

A firm's current assets can be increased as a percentage of sales, but not fixed assets. Why is this the case?

Homework Answers

Answer #1

Current assets have a component called receivables (Trade Receivables, Account Receivables, Note Receivable) which directly vary with sales as it represents the credit sales that happened or provided to the customers are yet to be received. Due to accrual principle of GAAP, it is accounted for under the current assets section of the balance sheet and varies with sales. So on the increase in sales figure the receivables increase proportionately.

But the fixed assets include Plant, Property, and Equipment which are pre-planned as they are capital intensive, and hence they are already installed and work on different capacities or efficiency to meet the sales target. So the change in efficiency or utilization of assets would generate diffrent sales.

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