Average operating assets refer to the average of beginning and ending operating assets of a business in an accounting period.
It can be calculated by adding the beginning and ending figures of operating assets and then dividing it by two. Operating assets include cash, inventory, equipment, receivables, and any other assets utilized in the operating activities of a business.
What are Operating Assets?
Operating assets are current and fixed assets utilized by a company in its operations to generate revenue.
It simply means all types of assets in use for the operating activities of a business are called operating assets. These can be classified in different ways like cash and non-cash assets, current and fixed assets, and tangible and intangible assets.
Common examples of operating assets include:
- Cash and cash equivalents (short-term securities)
- Inventory and Raw materials
- Accounts receivable
- Prepaid expenses
- Fixed Assets like Property, Plant, and Equipment (PPE)
- Intangible assets like copyrights, patents, and intellectual property
Some of these asset types can be operating while others can be non-operating in nature. However, if any of these assets are used in the operating activities, they should be included in operating assets.
Now, we’ll move on to know what the average operating assets of a business are and how they are calculated.
What Are Average Operating Assets?
The average operating assets to the average of operating assets used by a business in its operating activities for a specific period.
It is the normal use of operating assets during an accounting period, usually a year. It can then be used in different operating ratios to analyze the operational efficiency of a business.
The average of operating assets simply tells us how a business has grown its operating assets in a specific period. It is simply a comparison between the beginning and engine figures of operating assets of a business.
Thus, this figure will simply compare the increase or decrease in operating assets without comparing them to any other item like operating liabilities.
Like any other financial metric, a static figure of operating assets doesn’t reveal much. Therefore, analysts must establish a trendline to conclude whether a business is increasing or decreasing its assets.
Further, care must be taken to understand whether the final figure has appreciated because of the larger proportion of operating assets at the beginning or end of the reporting period.
For example, a business may have an average operating assets figure of $750,000 but if it is because of an opening balance of $500,000 of operating assets, the company’s operating assets have fallen considerably during the period.
How to Calculate Average Operating Assets?
The calculation of average operating assets is simple while the interpretation of these figures should be done carefully.
The first step is to simply classify the operating assets of a business depending on its operating activities.
For example, a service business will have several types of intangible assets utilized in its core operating activities while a manufacturing business would include largely tangible assets.
In the next step, calculate the beginning balance of these operating assets for the accounting period. It can be taken from the balance sheet of the company as well.
The next step is to find the ending balance of the operating assets of the company. It includes adjustments of increase or decrease in operating assets during the accounting period.
The final step is to simply add the beginning and ending balances of operating assets and divide them by two.
The formula for average operating assets is:
Average Operating Assets = (Beginning Balance of Operating Assets + Ending Balance of Operating Assets) ÷ 2
Example
Let’s suppose a company Greenstar Co. manufactures confectionaries. We’ll take the operating assets and then calculate the average operating assets for this company.
Operating assets of Greenstar Co. include cash, inventory, manufacturing plant and equipment, Land and developed manufacturing property, and accounts receivable.
Beginning of the year:
- Cash = $700,000
- Accounts Receivable= $330,000
- Inventory= $1,200,000
- Property, Plant and Equipment (PPE)= $3,200,000
Total Beginning Operating Assets = $700,000 + $330,000 + $1,200,000 + $3,200,000 = $5,430,000
End of the Year:
- Cash = $870,000
- Accounts Receivable= $385,000
- Inventory= $890,000
- Property, Plant and Equipment (PPE)= $3,110,000
Total Ending Operating Assets = $870,000 + $385,000 + $890,000 + $3,110,000 = $5,255,000
Average Operating Assets = (Beginning Balance of Operating Assets + Ending Balance of Operating Assets) ÷ 2
Average Operating Assets = ($5,430,000 + $5,255,000)/2 = $5,305,000.
Average Operating Assets Vs Net Operating Assets
Both these terms relate to the operating assets possessed by a business. The difference lies in the comparison of operating assets though.
Average operating assets compare the beginning and ending balances of operating assets and take the average by simply dividing the sum of both figures by two.
It means it’s a comparison of the same figure at the beginning and ending point of an accounting period for the business.
On the other hand, the net operating assets figure is obtained after deducting all operating liabilities from the operating assets of a business in a specific accounting period.
It is the net worth of a business in terms of its operating assets after paying off operating liabilities.
Both these terms are useful for comparing the operating efficiency of a business. However, the net operating assets figure provides a better picture of operating efficiency as it accounts for operating liabilities for the same period and activities.
Average Operating Assets Turnover Ratio
The average operating assets turnover ratio is a simple alteration of the widely used operating assets turnover ratio.
In this calculation, we can use the average operating assets figure instead of the commonly used total operating assets figure.
Average Operating Assets Turnover = Revenue/Average Operating Assets
Average Operating Assets = (Beginning Balance of Operating Assets + Ending Balance of Operating Assets) ÷ 2
So in this case, we’ll take average operating assets instead of total operating assets. It gives us another variation of measuring the operating efficiency of a business.
