Current assets may be converted to liquid assets at any time, but by definition, they are expected to be either used up or converted to cash within a year. Examples of current assets are accounts receivable and marketable securities.

Current assets are listed on a company's balance sheet, one of the primary financial statements that companies regularly publish. Current assets are used in the calculation of the current ratio, which measures assets against liabilities. The current ratio is considered to be one of the primary liquidity ratio metrics that investors and analysts use to evaluate the financial soundness of a company. Current assets are not typically an extremely large percentage of a company's total assets, but they are nonetheless critically important to a company's financial solvency as they provide the necessary day-to-day operating capital.

Since current assets include inventory, a portion of them are regularly being converted to cash. If a company experiences a temporary shortfall in cash on hand, it may solve the problem by converting other current assets such as marketable securities or certificates of deposit (CDs) into cash. Accounts receivable are a very important part of current assets. As they are paid, this provides the conversion of inventory into cash. The conversion of inventory into cash is a company's main source of both total revenues and operating capital.

Careful monitoring and management of accounts receivable is a necessary part of overall company management to ensure a company's ongoing financial soundness. This is particularly true if a company has just a few regular customers that provide a major portion of its revenues. If those primary customers suddenly and unexpectedly become slow in paying invoices, that can very quickly create cash flow problems for a company. Profitable, well-managed companies budget for possible interruptions or shortfalls in revenue by making sure to maintain sufficient amounts of current assets that can quickly be converted into cash whenever necessary.

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  2. What affects an asset's liquidity?

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  3. What is the proper ratio between working capital, current assets and current liabilities?

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  4. What is the relationship between the cash ratio and liquidity?

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  5. What is the difference between current and noncurrent assets?

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  6. What is the difference between a fixed asset and a current asset?

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