Assets are resources owned or controlled by companies and used in operations to generate revenues. They are a part of the balance sheet and appear as a separate section. Since assets are crucial in running a business, they also contribute to various financial metrics. However, they may not be a reliable measure due to fluctuations. Instead, users may prefer average total assets in those calculations.
What are Average Total Assets?
Average total assets represent the mean position of the total assets of a company. It is a value used in various financial metrics to calculate ratios and other crucial figures. Essentially, users can put total assets reported in the balance sheet in those calculations. However, if the figure has fluctuated over the period, those calculations may not provide an accurate result.
Instead, users average out any fluctuations over the period by determining the mean position for total assets. It helps them get a more accurate result with the calculations. However, this advantage is only theoretical. Average total assets involve determining the average amount of total assets on the balance sheet over a specified period. Usually, users consider the current year and preceding year’s balances.
Average total assets can also help companies in their internal calculations. These assets determine how much resources are available to generate revenues. Therefore, taking an average figure can help in more accurate decisions. It can be crucial in financial ratios such as asset turnover, return on asset ratio, etc. On top of that, average total assets can also help understand the mean position for those assets.
How to calculate Average Total Assets?
Calculating average total assets is straightforward. It requires users to choose the period they want to determine the mean position for total assets. Usually, it involves establishing the closing balances for assets at the start and end of a financial period. Both of these figures are available on the balance sheet.
The balance sheet includes asset balances for two periods. The closing balance for the prior period becomes the opening figure for the current period. Similarly, the closing balance for the final period is also available on the balance sheet. Once users have these figures, they must add them and divide them by two to calculate the average total assets.
The formula for average total assets is as follows.
Average total assets = (Total assets at the end of current period + Total assets at the end of preceding period) / 2
Example
A company, Red Co., reported total assets of $200,000 at the end of the current financial period. However, this figure did not remain the same from the preceding period. The closing balance at the end of that period was $140,000. Based on these figures, the average total assets for Red Co. are as below.
Average total assets = (Total assets at the end of current period + Total assets at the end of preceding period) / 2
Average total assets = ($200,000 + $140,000) / 2
Average total assets = $170,000
The average total assets of $170,000 imply Red Co. has used an average of that amount of resources in its operations. The closing and opening figures, while relevant, may not provide an accurate analysis of the company’s operations.
Conclusion
Average total assets represent the mean position of a company’s assets over a period. It provides a more accurate figure for further financial analysis. In most cases, users prefer this figure in their financial ratios if the total assets have fluctuated over a period. Calculating this metric is straightforward based on the average total asset formula.
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