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A current asset is a balance sheet item that can be cash, something similar to cash, or can be converted into cash within a year. Even though an organisation’s operational cycle is longer than a year, if an asset can be converted into cash during that period, it is still deemed current in the majority of the cases.
Current Assets Examples
Current assets come in a variety of forms, depending on the business. Within most industries, the following asset classes are regarded as current assets:
Money in any form, including foreign currencies
Prepaid expenses, with the exception of investments that are difficult to dispose
Accounts payable and receivables
Inventory
Listings of Current Assets
Now that we know what current assets are, let’s discuss the items included in the current assets in detail:
Cash and its Equivalents
Companies require cash to operate on a daily basis. Coins and paper money, checking accounts, money orders, and undeposited receipts are all examples of cash.
To produce additional income, excess cash is typically placed in low-risk, highly liquid securities. This is referred to as “monetary equivalents.” Money market mutual funds, commercial paper, treasury securities, and bank certificates of deposits are examples of cash equivalents.
Securities (Marketable)
Publicly-traded securities are known as “marketable securities”. There are two forms of marketable securities: equity and debt securities. These securities are another example of current assets and have a ready market for purchasers. As a result, they are short-term investments.
Accounts Receivable
Accounts receivables refer to the credit issued to a customer. This indicates that the company has provided services to the customer or has delivered the product. However, the money has not yet been entirely collected.
Inventory
The term “inventory” is those current assets that refer to the items and materials that are currently on hand. Work in progress inventory, raw material inventory, and finished goods inventory are the three types of inventory.
Expenses that are Paid in Advance (prepaid)
Prepaid expenses are those current assets that emerge from a company making advance payments for goods or services delivered in the future. Prepaid expenses are represented as assets at first, but their value is expensed onto the income statement over time.
Non-Trade Receivables
Non-trade receivables are invoices that must be paid by vendors, employees, or other persons/ entities/ for non-business purposes. Non-trade receivables include loans or salary advances owed by employees, prepaid deposits owed by vendors, tax refunds owed by tax authorities, and insurance claims owed by insurance companies. If the Company’s claims are due to mature or be paid within a year, they are classified as non-trade receivables in current assets.
Additional Current Assets
Other current assets are any assets held by the company that can be converted to cash in a year but are not classed in one of the aforementioned categories. The notes to the financial statements usually provide information about the company’s other assets.
While understanding the current assets meaning, you’d also need to understand these different types of current assets.
Analysing Firms based on their Current Assets
Assessing a company’s current assets is an important first step in determining its financial condition. Analysts take a step further and compare current assets with current liabilities.
To have a better knowledge of a company’s financial status, analysts might make use of the present assets and other financial data available to them.
The Balance Sheet
The balance sheet, one of the most important financial documents, can be used to determine the present assets of a corporation. A company’s balance sheet statement shows both current assets examples and current liabilities.
It is possible to divide the assets into current and non-current assets in this section. It is also possible to classify current assets according to their liquidity, which measures how readily they may be converted into cash. It is possible that inventories and accounts receivable could be listed at the bottom of a balance sheet.
The Financial Ratios
Inputs for various financial ratios can also represent the current assets of a corporation. Liquidity ratios are often used ratios involving current assets that provide information on a company’s near-term financial health:
- Current assets/current liabilities ratio: The current ratio, or working capital ratio, gauges a company’s capacity to meet its short-term obligations.
- Quick ratio (current assets / current liabilities): Quick ratio, also known as the acid-test ratio, compares a subset of current assets to current liabilities that can be converted into cash within 90 days of the measurement date.
If a corporation has a current ratio of less than one, it could signal that it will have difficulty meeting its short-term obligations. There may be advantages to a bigger total. It’s possible that organisations with high ratios aren’t employing their money as efficiently as they can.
Key pointer
As the company receives and expends cash, it is critical to effectively manage the company’s cash flow. It’s important to look at current assets and liabilities, but they won’t necessarily reveal your day-to-day financial responsibilities.
An important component of evaluating a company’s financial position is determining whether or not its current assets can meet its short-term liabilities. Businesses that have the financial wherewithal to pay their bills and seize opportunities may have a better chance of surviving and succeeding in the long term.
To understand the current asset’s meaning, you’ll need to understand all these concepts.
Conclusion
A company’s ability to turn the value of all assets into cash within a year can be characterised as current assets. If a business has liquid assets like short-term investments, cash, and cash equivalents, it can boost its profits simply by putting them to use. Depending on the industry, it might be anything from retail to pharmaceuticals to oil. Assets are the most important factor in determining a company’s value and its financial health. Such assets might be a wonderful tool to assess a business’ capacity for financing its operations.
