What Are Current Assets?
Current assets are all of a company’s assets that are projected to be sold, consumed, used, or exhausted within one year of normal business operations. A company’s current assets are listed on its balance sheet, which is one of the annual financial statements that must be prepared.
Cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets are examples of current assets. Current assets and current accounts are two different terms for the same concept.
The Formula for Current Assets
As a result, the current assets formula is just the sum of all assets that can be converted to cash in a year. When examining at a company’s balance sheet, for example, we can add up:
Current Assets = C + CE + I + AR + MS + PE + OLA
where:
C = Cash
CE = Cash Equivalents
I = Inventory
AR = Accounts Receivable
MS = Marketable Securities
PE = Prepaid Expenses
OLA = Other Liquid Assets
Understanding Current Assets
Long-term assets, on the other hand, are assets that cannot be converted into cash in a year’s time. Land, infrastructure, equipment, copyrights, and other illiquid investments are common examples.
Businesses value current assets because they can be utilized to fund day-to-day operations as well as pay for ongoing operational expenses. It also indicates a company’s liquid assets because the word is stated as a dollar worth of all assets and resources that can be quickly converted to cash in a short period of time.
However, care should be taken to include just those qualifying assets that can be sold at a reasonable price within the next year. For example, many commonly used fast-moving consumer goods (FMCG) products manufactured by a corporation are likely to be easily sold in the coming year. Inventory is included in current assets, but land and heavy machinery may be difficult to sell, thus they are removed from current assets.
Current assets can range from crude oil barrels to fabricated goods, work-in-progress inventory, raw materials, and foreign currency, depending on the nature of the firm and the products it sells.
Key Components of Current Assets
Current assets include cash, cash equivalents, and liquid investments in marketable securities such as interest-bearing short-term Treasury bills or bonds. Current assets, on the other hand, include the following:
Accounts Receivable
Current assets are money owing to a corporation for goods or services delivered or utilised but not yet paid for by consumers, as long as they can be expected to be paid within a year. A part of a company’s accounts receivables may not qualify for inclusion in current assets if it makes sales by giving customers extended terms of credit.
It’s also likely that some accounts will never be completely paid off. An allowance for questionable accounts is removed from accounts receivable to reflect this concern. If an account isn’t paid, it’s written off as bad debt expenditure, and such entries aren’t considered as current assets.
Inventory
Inventory, which includes raw materials, components, and finished goods, is considered a current asset, although its assessment may require some thought. Inventory can be inflated using various accounting procedures, and it may not always be as liquid as other current assets, depending on the product and industrial sector.
For example, there’s no certainty that a dozen units of high-priced heavy earth-moving equipment will be sold in the following year, but there’s a much better probability that a thousand umbrellas will be sold during the rainy season. Inventory is less liquid than accounts receivable, and it drains into working capital. Inventory can become backlogged if demand fluctuates suddenly, which is more typical in some industries than others.
Prepaid Expenses
Current assets are prepaid expenses, which are payments made in advance by a corporation for products and services to be received in the future. They are the payments that have already been paid, despite the fact that they cannot be transformed into cash. These components free up funds for other purposes. Payments to insurance companies or contractors are examples of prepaid expenses.
Current assets are usually included on the balance sheet in order of liquidity; that is, the items that are most likely to be turned into cash are listed first. Cash (including money, bank accounts, and petty cash), short-term investments (such as liquid marketable securities), accounts receivable, inventories, supplies, and pre-paid expenses are the normal order in which current assets appear.
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