Average Operating Assets
Average operating assets represent the average value of a company’s assets that are used in its normal business operations over a specific period, usually a year. These assets include items such as cash, accounts receivable, inventory, property, plant, and equipment. Average operating assets are often used in various financial ratios and performance metrics to evaluate a company’s operational efficiency and profitability.
To calculate the average operating assets, you need to determine the beginning and ending balance of the operating assets for the period under consideration and then compute the average by adding them together and dividing by two.
Here’s the formula for calculating average operating assets:
\(\text{Average Operating Assets} = \frac{\text{Beginning Operating Assets + Ending Operating Assets}}{2} \)
Example of Average Operating Assets
Let’s assume we have a fictional company named “TechWidget Co.” that manufactures and sells electronic gadgets. We will analyze the average operating assets for TechWidget Co. for a specific year. Here are the relevant balances for TechWidget Co.’s operating assets at the beginning and end of the year:
Beginning of the Year:
- Cash: $50,000
- Accounts Receivable: $40,000
- Inventory: $100,000
- Property, Plant, and Equipment: $500,000
Total Beginning Operating Assets = $50,000 + $40,000 + $100,000 + $500,000 = $690,000
End of the Year:
- Cash: $60,000
- Accounts Receivable: $45,000
- Inventory: $120,000
- Property, Plant, and Equipment: $520,000
Total Ending Operating Assets = $60,000 + $45,000 + $120,000 + $520,000 = $745,000
Now we can calculate the average operating assets for TechWidget Co. for the year:
\(\text{Average Operating Assets} = \frac{\text{Beginning Operating Assets + Ending Operating Assets}}{2} \)
\(\text{Average Operating Assets} = \frac{690,000 + 745,000}{2} = \frac{1,435,000}{2} = 717,500 \)
Thus, the average operating assets for TechWidget Co. during the year are $717,500. This figure can be used in various financial analyses, such as calculating the return on investment (ROI) or assessing the company’s operational efficiency through asset turnover ratios.
