Current assets are all assets a company expects to sell, use or consume within a normal operating cycle, usually one year. They are vital to a company’s liquidity and ability to run day-to-day operations, including paying short-term debts and other obligations.
Content Outline
Key Takeaways for Current Assets
Short-Term Liquidity
Current assets are used to cover short-term liabilities and operational costs.
Cash Conversion
These assets will be converted into cash within a year or the company’s operating cycle.
Includes Many Types
Current assets can be cash, accounts receivable, inventory and more.
Balance Sheet Item
Current assets are on the balance sheet, so you can see the company’s financial health.
Types of Current Assets
1. Cash and Cash Equivalents
Physical cash, bank balances and short-term investments that can be converted into cash quickly, such as Treasury bills and money market funds.
2. Accounts Receivable
Money owed to the company by customers for goods or services delivered on credit. Accounts receivable are expected to be collected within a short period.
3. Inventory
Raw materials, work-in-progress and finished goods that a company holds for sale. For retail or manufacturing businesses, inventory is a big current asset.
4. Prepaid Expenses
Payments made for goods or services to be received in the future, such as insurance or rent. Since the benefit will be used up within a year, it’s a current asset.
5. Marketable Securities
Short-term investments that can be converted into cash quickly, like stocks or bonds, are held for trading purposes.
Current Assets vs Non-Current Assets
Current Assets
- Will be converted into cash or used within one year.
- Provides short-term liquidity.
- Examples: Cash, inventory, and accounts receivable.
Non-Current Assets
- Held for more than one year and not convertible into cash.
- These assets are used for long-term operations.
- Examples: Property, equipment, patents, and long-term investments.
Formula for Current Assets
Add up all assets that can be liquidated within one year:
Current Assets = Cash + Accounts Receivable + Inventory + Prepaid Expenses + Marketable Securities
Example
Let’s say ABC Corporation has the following current assets on its balance sheet:
- Cash: $50,000
- Accounts Receivable: $30,000
- Inventory: $40,000
- Prepaid Expenses: $10,000
- Marketable Securities: $20,000
Using the formula
Current Assets = $50,000 + $30,000 + $40,000 + $10,000 + $20,000 = $150,000
ABC Corporation has $150,000 in current assets to cover its short term liabilities and operational costs.
Current assets are a key measure of a company’s short term liquidity. Now you know what current assets include and how they differ from non-current assets, you can manage your financials and operations better.