Current assets represent all assets of a company anticipated to be sold, consumed, used, or exhausted through standard business operations in one year. They appear on balance sheets (one of the required financial statements that must be completed each year).
Current assets can also be called current accounts. They are valuable to businesses since they can fund day-to-day business operations and pay for ongoing operating expenses. While the term is reported as a dollar value of all the assets and resources that can easily be converted to cash in a short period, it represents a company’s liquid assets. Some examples of liquid assets include cash, investments, prepaid expenses, accounts receivables, and inventory.
What are Current Assets?
Current assets are a crucial part of a company’s total balance sheet. They also can be used in determining the company’s overall health. Cash, inventory, and any accounts receivable are considered current assets in the business’s possession. They differ from long-term assets, which single out a company’s assets that may not be turned into cash within a year. Various components make up the current assets. The types of assets include cash and cash equivalents, short-term investments, inventory, and prepaid expenses.
What are the Examples of Current Assets?
Typically, a business’s current assets include cash, short-term investments, current accounts, receivables, or shareholder equity. However, there are other examples of current assets:
Cash and Cash Equivalents
Cash and cash equivalents are short-term commitments easily transformed into known cash amounts. Some examples are cash, checking account balances, some U.S. treasury bills, undeposited receipts, and money orders.
Temporary or short-term investments (also known as “marketable securities” are current assets expected to be liquidated in one year. Some examples include certificates of deposit, money market accounts, high-yield savings accounts, mutual funds, and stocks and bonds.
Inventory and Supplies
Inventory (which represents raw materials, components, and finished products) is a part of current assets, but it might need more consideration. Different accounting methods are used to inflate inventory, and at times, it may not be as liquid compared to other current assets. This varies based on the product and industry sector.
What is the Function of Current Assets in a Business?
Current assets are of great importance to company management regarding the daily operations of a business. As payments toward bills and loans are due at the end of each month, management has to be prepared to spend the necessary cash. The dollar value the total current assets figure represents reflects the company’s cash and liquidity position. It also allows management to make necessary arrangements and resume business operations.
Why are Current Assets Classified as Short-term Assets?
Current assets are classified as short-term assets for accounting purposes. Since current assets are anything that can be converted into cash within one year, this counts products sold for cash. It also consists of resources that are consumed, used, or exhausted through regular business operations with an expected cash value return within a single year. Short-term investments and marketable securities are investments in securities that will provide a cash return within a single year.
How are Current Assets Calculated?
It is simple to calculate current assets by following a few steps.
- Add up all cash and cash equivalents
First, to calculate your total current assets, you must add up all petty cash and currency held in checking accounts. For instance, if a company has $35,000 in petty cash and $112,500 held in checking accounts, its total amount in cash and cash equivalents equals $147,500.
- Combine all short-term investments
Next, compute the total of all temporary and short-term investments. Suppose your company has $50,000 in stocks. This number represents the total amount in short-term investments.
- Find the total of current accounts receivable
After combining cash and short-term investments, calculate the total current accounts receivable. You can figure this out by adding up any amounts owed to the business by customers. If a magazine brand assesses $67,000 in subscription fees and bi-annual membership fees of $93,200 are owed to them, then the magazine company’s total accounts receivable would be $160,200.
- Add up all inventory, supplies, and prepaid expenses
The final step is to combine all of the tangible assets, such as the company’s inventory, supplies, and any prepaid expenses. For example, an online service provider may not have tangible inventory, so the company must calculate resources like copyrights or website domains. Even prepaid expenses such as hosting and domain subscriptions are included.
What are the Current Asset Ratios?
Business operations often have various distinctive aspects, accounting methods, and contrasting payment cycles. Due to this, it can be challenging to accurately categorize which assets can be considered current for a certain period. The three following financial ratios can measure a business’s liquidity. And each ratio can use different numbers of current asset elements to measure against the business’s current liabilities.
- Current Ratio
The current ratio measures a company’s ability to pay off short-term obligations. It considers the current assets relating to the company’s current liabilities. To determine the current ratio, divide the current assets by the current liabilities.
- Quick Ratio
Quick ratio gauges the possibility of a company to fulfill short-term obligations with cash, cash equivalents, accounts receivable, and any marketable securities. To calculate the quick ratio, add all current and long-term assets together, then divide by the total liabilities.
- Cash Ratio
The cash ratio calculates a company’s ability to pay back all its short-term liabilities (usually within an immediate period). To get the cash ratio, add up only cash and cash equivalents. Then, divide by the current liabilities.
What is the Ratio of Current Assets to Current Liabilities?
The current ratio is the ratio of current assets to current liabilities. Analysts and creditors often use this financial ratio, which measures a company’s ability to pay its short-term financial debts or obligations. The ratio (determined by dividing current assets by current liabilities) shows how well a company manages its balance sheet for paying off short-term debts and payables. Additionally, investors and analysts can decide whether a company has enough current assets on its balance sheet to satisfy or pay off its current debt and other payables.
Current liabilities are generally settled by using current assets, which are used up within a year. Current assets consist of cash or accounts receivables, which is money customers owe for sales. The ratio of current assets to current liabilities is beneficial in assessing a company’s ability to pay its debts as they are due. Some examples of current liabilities are accounts payable, short-term debt, dividends, and notes payable.
Where can you Find Current Assets?
Current assets appear on a company’s balance sheet, one of the financial statements that must be completed each year. They represent all assets of a company that are sold, consumed, or used within one year. Also, current assets are listed as the first items on a balance sheet (arranged in the order of their liquidity).
What is the Difference Between Current vs. Non-Current Assets?
Noncurrent assets (or fixed assets) are intended for longer-term use (one year or longer). Also, they are not easily liquidated. On the other hand, current assets endure depreciation, which divides a company’s cost for non-currents to expense them over a significant period. Additionally, current assets can be converted to cash within one operating cycle and play a role in day-to-day operations.
Type of Asset
|Current Assets||Current assets can be converted into cash within one fiscal or operating year. They are used to expedite day-to-day operational expenses and investments. Therefore, short-term assets are liquid, meaning they can transform into cash and be used to pay bills and obligations due in the short term.||Cash and cash equivalents
|Non-Current Assets||Non-Current assets (also known as fixed assets) are for longer-term use, as in one year or longer. They also are not liquidated easily. Unlike current assets, non-current assets undergo depreciation. Depreciation divides a company’s cost for non-current assets to expense them over their useful lives.||Land
What is the Role of Current Assets in Financial Analysis?
Managers, investors, and analysts have to gauge if a company has enough liquidity to meet its short-term obligations (such as payroll and bills). They accomplish this by looking at a firm’s current assets position, especially on current liabilities. Several liquidity ratios like the quick ratio and current ratio can be used for this reason. Keep in mind that the larger the ratio is, the better.
Information about current assets is helpful when gauging liquidity if you compare it to current liabilities. Companies tend to have more current assets than current liabilities. That means they can meet liabilities when they are due. However, not all current assets are liquid. The conversion is a long process. For instance, for inventories, some companies must develop raw materials into finished goods and sell them. The company may not receive any money immediately since it sells finished products on credit.
To analyze current assets, you need to relate these items to the sales or cost of goods sold (COGS) on the income statement.
Is Inventory Considered a Current Asset?
Inventory is considered a current asset since it can be converted into cash within one year. It includes raw materials, product parts, supplies, and finished products or services. While inventory can be a crucial asset, its liquidity may rely on the product and industry. For example, a business selling heavy equipment may have little guarantee that each machine might sell in one year. This contrasts with a swimwear company that has a high likelihood of selling large quantities of bathing suits during the summer.