What is Current Assets Formula?
The formula for current assets is calculated by adding all the assets from the balance sheet that can be transformed into cash within a period of one year or less. Current assets primarily include cash, cash, and equivalents Cash, And EquivalentsCash and Cash Equivalents are assets that are short-term and highly liquid investments that can be readily converted into cash and have a low risk of price fluctuation. Cash and paper money, US Treasury bills, undeposited receipts, and Money Market funds are its examples. They are normally found as a line item on the top of the balance sheet asset. , account receivablesAccount ReceivablesAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. , inventory, marketable securities, prepaid expensesPrepaid ExpensesPrepaid expenses refer to advance payments made by a firm whose benefits are acquired in the future. Payment for the goods is made in the current accounting period, but the delivery is received in the upcoming accounting period., etc. Adding all these together, along with other such liquid assetsLiquid AssetsLiquid Assets are the business assets that can be converted into cash within a short period, such as cash, marketable securities, and money market instruments. They are recorded on the asset side of the company's balance sheet., can help an analyst to understand the short term liquidity of a business.
It is noteworthy that usually, the result of the net current assets formula is listed on the company’s balance sheet in the descending order of liquidityOrder Of LiquidityThe presentation of various assets in the balance sheet with the time it takes for each to be converted into cash is known as the order of liquidity. Cash is considered a most liquid asset, followed by cash equivalents, marketable securities, account receivables, inventories, non-current investments, loans and advances, fixed assets. and cash being the most liquid form of the current assetCurrent AssetCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc. i.e., easily convertible to cash. It is listed first. These short term assetsShort Term AssetsShort term assets (also known as current assets) are the assets that are highly liquid in nature and can be easily sold to realize money from the market. They have a maturity of fewer than 12 months and are highly tradable and marketable in nature. are the vital components of a company’s short term liquidity and net working capitalNet Working CapitalThe Net Working Capital (NWC) is the difference between the total current assets and total current liabilities. A positive net working capital indicates that a company has a large number of assets, while a negative one indicates that the company has a large number of liabilities. requirement.
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Current Assets Formula Explained
The current assets formula includes the company’s resources or tools through which the business is expected to convert into revenue or profits within a particular time frame, usually a fiscal year or a business cycle.
The most common current assets include cash, accounts receivables, inventory, and other short-term assets. Let us understand each of them in brief to ensure we interpret them correctly, as these shall be the building blocks on which our in-depth understanding of this concept shall be built.
Cash and Cash Equivalents: This refers to the physical currency held by the company from the sale of inventory or other such activities that generate physical cash. Cash equivalents are instruments that can be converted into physical cash at any given time, such as short-term investments.
Inventory: This is the tangible goods and/or materials that are held by the company that can generate the revenue and profits to run the business. They are often referred to as the lifeblood of any organization that is the foremost source of revenue generation.
Accounts Receivables: This is the amount that is owed to the organization or business by its clients and customers. This is placed under current assets as the company expects this amount to be received within the same financial year, as the credit period to clients is usually 45-90 days.
Other Short-Term Assets: These are assets other than the ones mentioned above that are forecasted to be converted into cash within the coming year. Examples of such current assets are short-term investments and prepaid expenses.
The application of the total current assets formula shows the liquidity status of the company to stakeholders and shareholders, if applicable. It also shows if the company is equipped enough to meet their short-term financial obligations and if the company has efficient cashflow management.
The Total Current Asset Formula is represented as,
How To Calculate?
The calculation of the net current assets formula can be derived by using the following two simple steps:
- Firstly, gather all the assets, which can be liquidated within a period of one year or less, from the balance sheet of the company. Such assets include cash, cash equivalents, inventory, marketable securities, accounts receivables, and prepaid expenses, other liquid assets, etc.
- Finally, the total current assets formula is calculated by adding up all the short term assets mentioned in the previous step.
Current Assets = Cash and Cash Equivalents + Accounts Receivables + Inventory + Marketable Securities + Prepaid Expenses + Other Liquid Assets
What is Current Asset? Video with Explanation
Let’s see some simple to advanced examples to understand the calculation of the Total Current Assets Formula better.
Let us consider an example to calculate the current assets of a company called XYZ Limited. As per the annual report of XYZ Limited for the financial year ended on March 31, 20XX.
The template below shows the data of XYZ Limited for the calculation of Current Assets for the financial year that ended on March 31, 20XX.
Current assets = Cash and Cash Equivalents + Accounts Receivable + Inventory + Marketable SecuritiesMarketable SecuritiesMarketable securities are liquid assets that can be converted into cash quickly and are classified as current assets on a company's balance sheet. Commercial Paper, Treasury notes, and other money market instruments are included in it. + Prepaid Expenses.
So, the calculation of the Current Assets of XYZ Ltd., by using the above formula, can be as follows:
Therefore, Current Assets of XYZ Limited for the financial year ended on March 31, 20XXwill be :
=$100,000 + $40,000 + $12,000 + $33,000 + $6,000
The current assets of XYZ Limited for the year ended on March 31, 20XX is $191,000.
Let us take the example of Walmart Inc.’s annual report for the fiscal yearFiscal YearFiscal Year (FY) is referred to as a period lasting for twelve months and is used for budgeting, account keeping and all the other financial reporting for industries. Some of the most commonly used Fiscal Years by businesses all over the world are: 1st January to 31st December, 1st April to 31st March, 1st July to 30th June and 1st October to 30th September in January 2018.
The below template shows the data of Walmart Inc.’s for the fiscal year ending in January 2018.
Current assets (in USD Billions)=Cash and Cash Equivalents + Accounts Receivable + Inventory + Other current assets.
Therefore, the calculation for Current Assets of Walmart Inc.’s for the fiscal year ending in January 2018 can be:
Therefore, Current Assets of Walmart Inc.’s for the fiscal year ending in January 2018 will be,
=6.76 + 5.61 + 43.78 + 3.51
Current Asset of Walmart Inc.’s for the fiscal year ending in January 2018= $59.66
This means that Walmart Inc.’s current assets for the fiscal year ended in January 2018 stood at $59.66 Bn.
Let us take the example of Microsoft Corp.’s annual report for the fiscal year in June 2018.
The below table shows the data and calculation of Microsoft Corp.’s annual reportAnnual ReportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements. for the fiscal year in June 2018.
Current assets (in USD Billions)=Cash and Cash Equivalents + Accounts Receivable + Inventory + Other current assets.
Therefore, the current assets of Microsoft Corp. for the fiscal year ending in June 2018 will be:
=133.77 + 26.48 + 2.66 + 6.75
Current Assets of Microsoft Corp.’s for the fiscal year ending in June 2018 = $169.66
This means that Microsoft Corp.’s current assets for the fiscal year ended in June 2018 stood at $169.66 Bn.
Current Assets Formula Calculator
|Current Assets Formula =
|Cash & Cash Equivalents + Accounts Receivables + Inventory + Marketable Securities + Prepaid Expenses + Other Liquid Assets
|0 + 0 + 0 + 0 + 0 + 0 =
Example of Current Assets Formula (with Excel Template)
Now let us take the case of Apple Inc. to illustrate the calculation of current assets in the Excel template below. The table provides a detailed calculation of the current assets for the financial year ending on September 29, 2018, and September 30, 2017.
The template below shows the data and calculation calculations of Apple Inc. for the financial year ending on September 29, 2018, and September 30, 2017.
Therefore, the calculation of the current assets of Apple Inc for the financial year ending on September 30, 2017, is,
=20,289 + 53,892 + 17,874 + 4,855 + 17,799 + 13,936 + 128,645
Current Assets of Apple Inc for the financial year ending on and September 30, 2017, will be:
Current Assets of Apple Inc for the financial year ending on September 30, 2017=128,645
Similarly, we can calculate the Current Assets of Apple Inc for the financial year ending on September 29, 2018, by using the above formula,
Current Assets of Apple Inc for the financial year ending on September 29, 2018=119,252
Relevance and Use
It is vital to understand the concept of net current asset formula as it is a key indicator of a company’s short term financial health.
- The ideal ratio of the current assets to the current liabilities of the companyCurrent Liabilities Of The CompanyCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans etc. should be between 1.25 to 2.00.
- In case, the current liabilities exceed the current assets, i.e., the ratio is less than 1. It means that the company’s current assets are not enough to cover the current financial obligations adequately.
- Again, in case, the current assets exceed the current liabilities, i.e., the ratio is around 1.5, then the company has enough assets to pay off the short-term debts.
- On the other hand, having too much current assets can be seen as a bad thing as this indicates that the company is either not willing to or is unable to invest the profits into upcoming growth projects.
- Achievement of the correct balance of current assets and current liabilities can be a positive indicator to lenders and investors that the company has enough cash in hand for financial emergencies and that the company is investing the profits in the right kind of opportunities.
This has been a guide to Current Assets Formula. Here, we explain how to calculate along with practical examples and downloadable Excel templates. You can learn more about accounting from the following articles –
- INDEX Formula Excel
- Current Assets Examples & Types
- Current Liabilities FormulaCurrent Liabilities FormulaCurrent liabilities are the company's obligations expected to get paid within one year and are calculated by adding the value of trade payables, accrued expenses, notes payable, short-term loans, prepaid revenues, and the current portion of the long-term loans.