CURRENT ASSETS: WHAT IT CONSISTS OF, ACCOUNTS AND EXAMPLES - DUDAS - 2024

The current assets is the term used to represent all the assets of a company expected to sell, consume or deplete properly through trade standards, so you can convert them to a cash value over the next twelve months.

Current assets include cash, cash equivalents, accounts receivable, inventories, marketable securities, prepaid liabilities and other liquid assets. In some jurisdictions, the term is also known as checking accounts.

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Since these assets are standard items that appear on the balance sheet, their time horizon represents a maximum of one year from the date shown in the header of the company's balance sheet.

The term contrasts with long-term assets. These represent assets that cannot be converted to cash in the space of one year. They typically include land, facilities, equipment, copyrights, and other illiquid investments.

Importance

The total amount of current assets is of primary importance to the management of the company in regards to its daily operations.

As bill and loan payments are due with some frequency, such as at the end of each month, management must be able to make available the cash needed to pay its obligations on time.

Many use various liquidity indicators, which represent a type of financial metrics used to determine a debtor's ability to pay current debt obligations.

Such commonly used ratios include current assets as a key ingredient in their calculations.

What is current assets?

Current assets are important to businesses because they can be used to fund daily business operations. Also to pay ongoing operating expenses.

Since the term is reported as a dollar value of all assets and resources that can be easily converted to cash in a short period of time, it also represents the liquid assets of a company.

However, care must be taken to include only qualified assets that can be liquidated at a fair price over the next year.

For example, there is a high probability that a large quantity of consumer goods produced by a company can be easily sold in the next year. This qualifies the inventory to be included in current assets, but it can be difficult to sell land or heavy vehicles.

Depending on the nature of the business and the products it markets, current assets can range from barrels of crude oil, finished products, work-in-progress inventory, raw materials, or foreign currency.

Indicators that use current assets

The monetary value represented by the current assets figure provides an overview of the company's liquidity position. This allows management to prepare to make the necessary arrangements to continue operations.

Additionally, creditors and investors closely monitor a company's current assets to assess the value and risk involved in its operations.

The following indicators are used to measure the liquidity position of a company. Each uses a different number of components of assets versus current liabilities.

The current ratio measures the ability of a company to pay short- and long-term obligations, taking into account the total current assets of a company in relation to current liabilities.

The quick ratio measures the ability of a company to meet its short-term obligations with its most liquid assets. Consider cash, marketable securities, and accounts receivable, but not inventory, against current liabilities.

The cash indicator measures the ability of a company to immediately pay off all its short-term liabilities. It is calculated by dividing cash and cash equivalents by current liabilities.

Current assets accounts

On the balance sheet, current assets will normally be shown in order of liquidity; that is, the items that have the greatest probability and convenience of becoming cash will be ranked at the beginning.

The typical order in which the accounts that constitute current assets can appear is:

- Cash, which includes currency, checking account balances, petty cash, and undeposited checks that are not postdated.

- Cash equivalents, such as government securities that were purchased within 90 days of expiration.

- Short-term investments, such as liquid negotiable securities, such as certificates of deposit with a maturity of less than one year from the balance sheet date.

- Accounts receivable.

- Notes receivable, such as income tax refunds, cash advances to employees, and insurance claims.

- Inventories of raw materials, products in process and finished products.

- Prepaid expenses, such as insurance premiums that have not yet expired.

Accounts receivable

They represent the money owed to a business for goods or services already delivered or used, but not yet paid for by customers. They are considered current assets as long as it is expected that they can be paid within a year.

If a business makes sales by offering longer credit terms to its customers, a portion of its accounts receivable may not qualify for inclusion in current assets.

It is also possible that some bills are never paid in full. This consideration is reflected in a provision for doubtful accounts, which is subtracted from accounts receivable.

If an account is never charged, it is recorded as a bad debt expense. This record is not considered current assets.

Inventory

Represents raw materials, components, and finished products. It is included as current assets, but considering it that way may require careful thought.

Different accounting methods can be used to inflate inventory. Sometimes it may not be as liquid as other current assets, depending on the product and the industry sector.

For example, there is little or no guarantee that a dozen units of high-cost earthmoving equipment will be sold over the next year. On the other hand, there is a relatively greater chance of successfully selling a thousand umbrellas in the upcoming rainy season.

Inventory may not be as liquid as accounts receivable, locking in working capital. If demand changes unexpectedly, the sale of inventory can be delayed.

Prepaid expenses

They represent payments made by a company in advance for products and services that will be received in the future. They are considered current assets.

Although they cannot be converted into cash, they are payments that have already been made. Such components free up capital for other uses. Prepaid expenses could include payments to insurance companies or contractors.

Differences with non-current assets

The main problem with relying on current assets as a measure of liquidity is that some of the accounts within this classification are not as liquid. In particular, it can be difficult to easily convert inventory to cash.

Similarly, there may be some extremely past due bills within the accounts receivable amount. However, there should be an offset amount in the doubtful account provision to represent the amount that is not expected to be collected.

Therefore, the content of current assets must be carefully examined to determine the true liquidity of a company.

Restricted cash, which is cash that cannot be withdrawn or used for routine operations, depreciable assets, accounts receivable that do not mature in 12 months or less, and land, are examples of things that are not current assets.

Furthermore, a non-current asset can also be defined as an asset that is not sold directly to the consumers or end users of a company.

Bakery example

As an example, the current assets of a bakery company would be its inventory, in this case being the flour, yeast, etc., the value of the sales that are owed to the company through credit, that is, accounts receivable, and cash in the bank.

Your non-current assets would be the oven used to bake the bread, the motorized vehicles used to transport the deliveries, the cash registers used to handle cash payments, etc.

Although these non-current assets have value, they are not sold directly to consumers. They also cannot be easily converted to cash.

These are items of value that the organization has purchased that they will use for an extended period of time.

Non-current assets typically include items such as buildings, vehicles, furniture, computers, and machinery. These receive favorable tax treatment, such as the provision for depreciation.

Examples

The current assets formula is a simple sum of all assets that can be converted to cash over the course of a year. All of these assets usually appear on a company's balance sheet.

Current Assets = Cash + Cash Equivalents + Inventories + Accounts Receivable + Marketable Securities + Prepaid Expenses + Other Liquid Assets.

For example, the total current assets of retailer Walmart Inc. for the fiscal year ending January 2018 is the sum of cash ($ 6.76 billion), total accounts receivable ($ 5.61 billion), of inventory ($ 43.78 billion) and other current assets ($ 3.51 billion), which amount to a total of $ 59.66 billion.

Similarly, Microsoft Corp. had short-term and cash investments of $ 133.77 billion, total accounts receivable of $ 26.48 billion, total inventory of $ 2.66 billion, and other current assets of $ 6.75 billion. for the fiscal year ending June 2018.

Thus, the leading technology company had total current assets of $ 169.66 billion.

References

1. Will Kenton (2018). Current Assets. Taken from: investopedia.com.
2. Accounting Coach (2019). Which assets are classified as current assets? Taken from: accountingcoach.com.
3. Investing Answers (2019). Current Assets. Taken from: investinganswers.com.
4. Wikipedia, the free encyclopedia (2019). Long-term assets. Taken from: en.wikipedia.org.
5. Steven Bragg (2018). Current asset. Accounting Tools. Taken from: accountingtools.com.
6. Wall Street Mojo (2019). Current Assets. Taken from: wallstreetmojo.com.