Current assets are assets that the company could convert into cash within a year in the normal course of business. Current assets include cash, accounts receivable, inventory, marketable securities, prepaid expenses and anything else that can easily be turned into cash. Current assets are used to calculate financial ratios such as the current ratio, which divides current assets by current liabilities. To see any company’s current assets, just look at its balance sheet.
John owns a small publishing company. Here are what his company’s current assets consist of:
Cash from sales - $30,000.
Money in checking and savings accounts - $50,000.
Short-term investments; in this case, U.S. Treasuries - $50,000.
Accounts receivable, or payments the company is waiting to receive for publishing services sold on credit - $20,000.
Inventory: $0, because John publishes e-books and does only print-on-demand for paper and hardback books.
Prepaid expenses - Payments for services John’s company expects to receive in the near future. These include rent - $0, because John operates out of a home office, $2,000 in professional insurance premiums, and $10,000 in taxes.
Total current assets: $162,000
Not included in John’s current assets are items that will not be converted into cash, sold or consumed within a year - such as John’s computers, office furniture, and the value of his solid reputation in the publishing world.
In This Series
InvestingA company’s quick assets can be easily converted into cash.
Managing WealthAn asset is a resource with economic value.
InvestingLearn about the current ratio, quick ratio, cash ratio and cash conversion cycle.
InvestingCurrent Liabilities are company debts due within one year or one operating cycle, whichever is greater. An operating cycle is the time it takes a company to purchase inventory and convert it ...
InvestingLearn about the components of the statement of financial position and how they relate to each other.
InvestingThe cash ratio is the ratio of a company's total cash and cash equivalents to its current liabilities.
InvestingWorking capital turnover is a ratio that helps show how efficiently a company is generating revenue per dollar of cash available to spend on operations.
InvestingCash and cash equivalents are items that are either physical currency or liquid investments that can be immediately converted into cash.
InvestingIf you know how to read it, the balance sheet provides valuable information on a potential investment.