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
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 ...
Managing WealthA financial asset is intangible property that represents a claim on ownership of an entity or contractual rights to future payments.
InvestingThe cash ratio is the ratio of a company's total cash and cash equivalents to its current liabilities.
InvestingUnderstanding how this measure works in the market can help keep your finances afloat.
InvestingSeven pieces of advice from Benjamin Graham on understanding financial statements.
InvestingActivity ratios measure how effectively a business uses its assets.