# Net Operating Assets: Definition & Calculation

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• 0:03 What Are Net Operating Assets?
• 2:43 Use of Net Operating Assets
• 3:07 Lesson Summary

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Lesson Transcript
Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology.

Companies use some assets to generate revenue while others are used for financing purposes. In this lesson, you will learn about net operating assets.

## What Are Net Operating Assets?

Let's meet Mr. Oak, who owns a furniture manufacturing company. He met with his accountant recently, and she discussed the company's net operating assets and how efficiently his company was using them. Mr. Oak isn't quite sure what net operating assets are and how they are calculated. Let's see if we can help Mr. Oak with this problem.

Assets are items of value that a business owns, and liabilities are amounts that a business owes to others, such as a debt. Net operating assets represent the difference between total assets and total liabilities after adjusting for assets or liabilities that relate to financing activities. They represent assets that a company uses to generate revenue, or the money it makes from selling goods and services to its customers.

Let's assume Mr. Oak's company has cash and a long-term loan with the bank. When calculating his net operating assets, he would deduct any assets that relate to financing activities (cash) and add any liabilities relating to financing activities (long-term bank loan). Financing assets are those assets that generate revenue in the form of interest for a company and examples include cash and marketable securities. Financing liabilities are those liabilities that generate interest expense for a company and include long-term debt, such as a bank loan.

The formula for calculating net operating assets is:

Total assets - financing assets - total liabilities + financing liabilities

Let's help Mr. Oak calculate the net operating assets for his company. Oak Company's:

• Total assets = \$750,000
• Total liabilities = \$250,000
• Cash = \$50,000
• Inventory = \$25,000
• Accounts payable = \$15,000
• Long-term bank loan = \$20,000

Oak Company's net operating assets are:

Total assets - financing assets - total liabilities + financing liabilities
\$750,000 - \$50,000 (cash) - \$250,000 + \$20,000 (long-term bank loan)
= \$470,000

Oak Company's net operating assets are \$470,000. Inventory is an operating asset, and accounts payable is an operating liability, and Oak Company would include them in the calculation of net operating assets.

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