Understanding Current Assets: Definition & Importance

Current assets are all assets that a company expects to convert to cash within one year. They are commonly used to measure the liquidity of a company. A company’s assets on its balance sheetBalance SheetThe balance sheet is one of the three fundamental financial statements. The financial statements are key to both financial modeling and accounting. are split into two categories – current and non-current (long-term or capital assets).

Current (Short-term) vs. Non-Current (Long-term Assets)

Examples include:

• Cash and cash equivalents
• Accounts receivableAccounts ReceivableAccounts Receivable (AR) represents the credit sales of a business, which have not yet been collected from its customers. Companies allow
• Inventory
• Short-term investments
• Notes receivable
• Prepaid expenses (e.g., insurance premiums that have not yet expired)
• Marketable securities

On the other hand, long-term assets (also known as capital assets) take longer to, and are more difficult to, convert into cash. Examples include:

• Property, plant, and equipment
• Long-term investments
• Intangible assetsIntangible AssetsAccording to the IFRS, intangible assets are identifiable, non-monetary assets without physical substance. Like all assets, intangible assets (trademarks, patents, goodwill)
• Deferred charges

Listing Assets on a Balance Sheet

For example, consider the balance sheet of Walmart for the period ending January 31, 2017:

Note that the assets are clearly listed in order of liquidity. Cash and cash equivalents are the most liquid, followed by short-term investments, etc. The total current assets for Walmart for the period ending January 31, 2017, is simply the addition of all the relevant assets ($57,689,000).

Important Ratios That Use Current Assets

Below is a list of useful liquidity ratios:

The Cash Ratio is a liquidity ratio used to measure a company’s ability to meet short-term liabilities. The cash ratio is a conservative debt ratio since it only uses cash and cash equivalents. This ratio shows the company’s ability to repay current liabilities without having to sell or liquidate other assets.

The Quick Ratio, also known as the acid-test ratio, is a liquidity ratio used to measure a company’s ability to meet short-term financial liabilities. The quick ratio uses assets that can be reasonably converted to cash within 90 days.

The Current Ratio is a liquidity ratio used to measure a company’s ability to meet short-term and long-term financial liabilities. The current ratio uses all of the company’s immediate assets in the calculation.

It is important to note that the current ratio can overstate liquidity. This is because the current ratio uses inventory, which may or may not be easily converted to cash within a year (this is the case for many retailers and other inventory-intensive businesses).

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Related Readings

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