Current assets: what it means and how to calculate it, with examples (2023)

What are current assets?

The current assets account is a balance sheet item listed in the assets section, which represents all assets owned by the company that can be converted into cash within a year. Current assets are assets whose value is recorded in the Current Assets account.

Current assets includemoney, cash equivalent,accounts receivable, stocks, bonds and securities, prepaid bonds and othersliquid assets. Current Assets can also be called Current Accounts.

Understand current assets

Public companies must adhere to generally accepted accounting principles and reporting procedures. Following these principles and practices, the financial statements must be generated with specific lines that generate transparency for the interested parties. One such statement is the balance sheet, which lists a company's assets, liabilities, and equity.

Current Assets is always the first account listed on a company's balance sheet in the Assets section. It is composed of sub-accounts that make up the Current Assets account. For example, Apple, Inc. lists multiple subaccounts under Current Assets that are combined to form the current Assets total, which is the value of all subaccounts under Current Assets.

This section is important for investors because it shows the company's short-term liquidity. According to Apple's balance sheet, he had $135 million in current assets that he could convert to cash in a year. That short-term liquidity is vital: if Apple had trouble paying its short-term obligations, it could liquidate those assets to help cover those debts.

Depending on the nature of the business and the products it trades, current assets can range from barrels of crude oil, manufactured goods, inventory toworking in progress,raw material, or foreign currency.

Types of current assets

Many assets can be considered current by different companies across industries. In general, most industries group their current assets into these subaccounts; however, you can see others:

• Cash and cash equivalents
• negotiable values
• accounts receivable
• Inventory
• Prepaid liabilities/expenses
• Other short term investments

On the balance sheet, current assets subaccounts are normally displayed in order of current asset liquidity. Assets that are most easily converted to cash are ranked first by the finance division or accounting firm that prepared the report. The order in which these accounts appear may differ because each company may account for the assets included differently.

Cash and cash equivalents

By definition, assets in the Current Assets account are cash or can be quickly converted into cash. Cash equivalents are certificates of deposit, money market funds, short-term government bonds and Treasury bills.

To qualify as current assets, these items must not have restrictions that inhibit their liquidity in the short term.

negotiable values

Bonds and Securities is the account where you enter the total value of liquid investments that can be quickly converted into cash without reducing their market value. For example, if a company's stock is trading at very low volumes, it may not be possible to convert it into cash without affecting its market value. These shares would not be considered liquid and, therefore, would not have their value recorded in the Current Assets account.

accounts receivable

Accounts Receivable – The value of all money owed to a business for goods or services delivered or used but not yet paid for by customers is recorded in Current Assets, provided the accounts are expected to be paid within one year. If a company makes sales by offering longer credit terms to its customers, some of its receivables may not be included in the current assets account.

Some receivables may also not be expected to be collected. This consideration is reflected in theProvision for bad debts, a subaccount whose amount is subtracted from the Accounts Receivable account.

Inventory

Inventory, which represents raw materials, components and finished goods, is included in the Current Assets account. However, different accounting methods can adjust inventory; may sometimes not be as liquid as other qualifying current assets, depending on product and industry sector.

For example, there is little or no guarantee that a dozen units of heavy earthmoving equipment will be sold in the next year, but there is a relatively high probability of a successful sale of a thousand umbrellas in the next rainy season. .

For these reasons, you should view inventory with skepticism. Read company reports or browse the Internet to determine what is happening with a company's inventory; it could also be standard practice or an industry trend for stock to be at specific levels.

Inventory also blocksworking capital. If demand changes unexpectedly, which is more common in some industries than others, inventory can build up.

prepaid liabilities

prepaid expenses—representing advances that a company makes for goods and services to be received in the future—are considered current assets. Although they cannot be converted into cash, they are payments that have already been made. These payments free up capital for other uses. Prepaid expenses can include payments to insurers or contractors.

Other short term investments

Many companies classify liquid investments in the securities account, but some may be classified in the other short-term investments account. An example would be investing surplus funds in a short-term bond, putting the funds to work but retaining the option to access them if needed.

Current Assets vs. non-current assets

If current assets are those that can be converted into cash within a year, non-current assets are those that cannot be converted into cash within a year. On a balance sheet, you can find some of the same asset accounts under Current Assets and Non-Current Assets. This is because these same types of assets can be tied up for a longer period of time, such as a marketable security that cannot be sold within a year or would sell for much less than its purchase price.

Properties, factories, buildings, facilities, equipment and otherssomethingInvestments are all examples of non-current assets because they can take a significant amount of time to sell. Non-current assets are also valued at their acquisition price because they are held longer and are depreciated. Current assets are valued at fair market value and are not depreciated.

Formula for current assets

The formulation of total current assets is a simple sum of all assets that can be converted into cash in a year. If a current assets subcategory does not appear in this formula, you can add it to Other Net Assets. Gather current asset information from a balance sheet and aggregate it. It's usually already totaled for you on the balance sheet under Total Current Assets:

$\begin{aligned} &\text{Current assets = C + CE + I + AR + MS + PE + OLA}\\ &\textbf{where:}\\ &\text{C = Money}\\ &\text {CE = Cash Equivalents}\\ &\text{I = Inventory}\\ &\text{AR = Accounts Receivable}\\ &\text{MS = Securities}\\ &\text{PE = Prepaid Expenses }\ \ &\text{OLA = Other Net Assets}\\ \end{aligned}$​ActivosActuales=C+CE+I+AR+MS+PE+OLAwhere:C=manualEC = Cash Equivalentsi=inventoryAR=Accounts ReceivableMS=Negotiable securitiesPE=Prepaid ExpensesOLA=OtrosActivosLiquidos​

real world example

Leading retailer Walmart Inc. (WMT) Total current assets for fiscal 2021 were $90 billion:

• Cash and short-term investments totaled $17.7 billion
• Total accounts receivable was $6.52 billion
• The stock was worth $45 billion
• Other current assets were $21 billion.

By comparison, for the 2021 fiscal year, Microsoft Corp. (MSFT) Total current assets were $184.4 billion:

• Cash and short-term investments totaled $130.3 billion
• Total accounts receivable was $38 billion
• Inventory was worth $2.6 billion
• Other current assets were $13.4 billion.

How do investors use current assets?

The value of total current assets is of paramount importance to the management of the company with regard to the daily operations of a business. As bill and loan payments come due, management must have the necessary cash. The dollar amount represented by the total current asset value reflects the company's cash and liquidity position. Allows management to reallocate and liquidate assets if necessary to continue business operations.

Lenders and investors closely monitor the current assets account to assess whether a company can afford to pay its obligations. Many use a variety ofliquidity ratios, which represents a class of financial metrics used to determine a debtor's ability to pay its current debt obligations without raising additional funds.

Financial Ratios Using Current Assets

The following ratios are commonly used to measure a company's liquidity position. Each relationship uses different subaccounts of current assets compared to the value of a company's current liabilities account:

• Hereal radioIt measures a company's ability to pay short-term obligations and considers a company's total current assets relative to thecurrent liabilitiesaccount - the amount of debts due within a year.
• Hequick reasonIt measures a company's ability to meet its short-term obligations with its most liquid assets. Divide the value of the Cash and Cash Equivalents account, the Bonds and Securities account and the Accounts Receivable account by the value of the Current Liabilities account. Inventory is excluded from this calculation because inventory liquidity can fluctuate.
• Hecash ratiomeasures a company's ability to pay all of its short-term obligations immediately, using cash, and is calculated by dividing the value of the Cash and Cash Equivalents account by the value of the Current Liabilities account.

The cash ratio is the most conservative, as it considers only cash and cash equivalents. The current ratio is the most flexible and includes multiple assets from the Current Assets account. These multiple measures assess the company's ability to pay outstanding debts and cover liabilities and expenses without settling its debts.fixed assets.

the bottom line

Current assets are any assets that a business can convert to cash in a short period of time, typically one year. These assets are listed in the current assets account on a publicly traded company's balance sheet.

Assets considered current vary by industry, but are generally classified into the following subaccounts: cash and cash equivalents, marketable securities, accounts receivable, inventory and other liquid assets.