WHAT IS CURRENT ASSETS? (WITH EXAMPLES) - DUDAS - 2024

The active current refers to all assets that can easily become effective, at most one year from the date shown in the top of the overall balance. They are used in the normal operating cycle of a company.

This cycle is the time it takes to buy or produce the inventory, sell the finished products, and collect the money from the sale, generally representing one year.

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Cash is necessary to finance operations. Whether new equipment is needed for the business or a larger office space, funds will have to be raised to pay for these investments. Funding can come from a loan, an investor, a business line of credit, or it can be paid in cash.

Cash and short-term assets that can be quickly converted to cash are also called current or liquid assets. Therefore, when an asset is liquid it means that it can be converted into cash in a short period of time.

List of current assets

Current assets are at the top of a company's balance sheet and are reported in order of liquidity.

- Cash

It is the most liquid asset of a company. Therefore, it is very important to maintain the short-term solvency of an entity. The amount shown in this current asset is the amount that the business has available.

Cash can be used to quickly cover daily expenses. Typically this account includes cash, currency, bank funds, checks, and money orders.

- Cash equivalent

They are the result of the cash invested by companies in financial instruments that generate interest in the very short term. These instruments are highly liquid, safe, and can easily be turned into cash, usually within 90 days.

These securities include treasury bills, commercial papers, and money market funds. They are easily traded on the market and the value of such goods can also be easily determined.

- Negotiable values

They are short-term investments made by the company. These investments are easily marketable and are expected to turn into cash within a year. These include treasury bills, notes, bonds, and also equity securities.

These securities are recorded at cost plus brokerage fees after purchase. The price of these securities can fluctuate rapidly, with any change in their value reflected in the company's income statement.

- Accounts receivable

They are the amounts that clients owe for products and services provided on credit by a company. These amounts are determined after considering the bad debt expense.

The increase in bad debt expense will lead to an increase in the provision for bad debt. Therefore, the net realization value of accounts receivable must be calculated, which is the difference between gross accounts receivable and the provision for bad debts.

- Inventories

Raw Materials

They consist of the materials stored to be consumed to make the products that will eventually be sold.

Products in process

They refer to goods that are in the manufacturing process and that have not yet been completed for sale.

Finished products

They refer to items that have been completed and are waiting to be sold in the normal course of business.

- Expenses paid in advance

They refer to the operating expenses of a company that have been paid in advance. Cash on the balance sheet is reduced at the time such expenses are paid at the beginning of the accounting period.

Simultaneously, a current asset is created with the same amount on the balance sheet under the name of prepaid expenses. Examples of prepaid expenses are prepaid rent, prepaid insurance, etc.

- Other current assets

They include deferred assets. These assets are created when the tax payable exceeds the amount of the "Expense for income tax" recognized by the company in its income statement.

Examples of current assets

- Wal-Mart

The following representation of Wal-Mart's balance sheet at the end of fiscal year 2015 can be considered:

Current assets are clearly separated and listed in order of liquidity. Cash is obviously the most liquid asset, and accounts receivable represent the cash that the company has already raised, but has not yet received.

Inventory is less liquid, because it represents assets that can take time to convert to cash.

- Nestlé India

Cash and cash equivalents

Cash and cash equivalents amounted to Rs 15,988 crore at the end of 2018. The company's operating cycle for dividing assets into current and non-current is one year. This is based on the nature of the goods produced by Nestlé.

The notes to the financial statements describe which items are included in cash and cash equivalents:

- Bank overdrafts.

- Bank balances.

- Demand deposits with a maturity period of 3 months.

- Checks.

Short-term investments

In Nestlé's case, they amounted to Rs 19,251 million by the end of 2018. Nestlé controls its current assets to eliminate liquidity risk, thus ensuring that it has sufficient liquidity to meet its operational needs.

This investment is sufficient to meet the requirements of your business within a desired period of time.

Accounts receivable

These accounts amounted to Rs 1,246 crore on Nestlé's balance sheet at the end of 2018. The company takes the following approach to calculating accounts receivable:

The expected credit loss on accounts receivable is given as a function of the probability of default during the useful life of such accounts. The allocation is determined after considering:

- The customer's credit profile.

- Commercial channels.

- The experience of defaults.

Inventories

Nestlé conducts inventories at net realizable value. However, items such as raw materials, packaging material, and other supplies are not recorded below cost. The methods used to determine the cost of inventories are as follows:

- Raw material and packaging material: First in, first out (FIFO).

- Products purchased for resale: Weighted average.

- Products in process and finished products: cost of material + percentage share of general production expenses.

Prepaid expenses

According to the notes to the financial statements that appear in Nestlé's annual report, they are part of the “Other current assets” account. Prepaid expenses for the end of 2018 amounted to Rs 77 million.

References

1. Sathish AR (2020). What Are Current Assets? - Meaning and Example. Intuit Quickbooks. Taken from: quickbooks.intuit.com.
2. Meredith Hart (2020). What's Considered a Current Asset? Taken from: blog.hubspot.com.
3. The Motley Fool (2017). How to Find Total Current Assets. Taken from: fool.com.
4. Investing Answers (2019). Current Assets. Taken from: investinganswers.com.
5. Wikipedia, the free encyclopedia (2020). Current Asset. Taken from: wikipedia.org.