Current Assets Definition
Current assets are expected to be consumed, sold, or converted into cash either in one year or in the operating cycle, whichever is longer. They are usually presented in order of liquidity on the balance sheet and include cash and cash equivalents, accounts receivables, inventory, prepaid and other short term assets .
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Source: Current Assets (wallstreetmojo.com)
List of Current Assets
It includes the following –
- Cash and Cash Equivalents
- Marketable Securities
- Account Receivables
- Inventory/Stock
- Prepaid Expenses
- Non-Trade Receivables
- Other Current Assets
Let us discuss these in detail –
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#1 – Cash and Cash Equivalents
Companies need cash to run their day to day operations. Cash usually includes checking accountsCash Usually Includes Checking AccountsChecking Account, also known as a transactional account, can be defined as a kind of deposits account held by a financial institution or non-banking financial institution which allows the holder of the account to deposit and withdraw money. This is one of the most liquid forms of money. It differs from a normal bank savings account since it allows multiple deposits and withdrawal in a particular period.read more, coins and paper money, undeposited receipts, and money orders.
The excess cash in normally invested in low riskInvested In Low RiskLow-risk investments are the financial instruments with minimal uncertainties or chances of loss to the investors. Although such investments are safe, they fail to offer high returns to the investors. read more and highly liquid instruments so that it can generate additional income. This is called cash equivalentsCash EquivalentsCash equivalents are highly liquid investments with a maturity period of three months or less that are available with no restrictions to be used for immediate need or use. These are short-term investments that are easy to sell in the public market..read more. Cash Equivalents may include commercial paper, money market mutual funds, bank certificate of deposits, and treasury securities.
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Source: Current Assets (wallstreetmojo.com)
Look at Microsoft 2007 Balance Sheet Assets – What is the % of cash & short-term investments as a % of “Total Assets.”
As we note from above, MacDonald’s percentage of cash and short-term investments to Total Assets was 58.28% in 2007 and 69.7% in 2006.
#2 – Marketable Securities
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.read more are securities that are heavily traded on public exchanges. Marketable securities are of two types – Equity and debt securities. The buyers for these securities are readily available. Hence they are short term assets.
#3 – Accounts Receivables
The credit given to the customer is known as Accounts ReceivablesAccounts ReceivablesAccounts receivables refer to the amount due on the customers for the credit sales of the products or services made by the company to them. It appears as a current asset in the corporate balance sheet.read more. This means that the company has rendered services or deliver the product to the customer. However, it has not collected the cash fully yet.
In Colgate, we note the following –
- 2014 – Net receivables is $1,552 mn, allowance is $54 mn; This implies Gross Accounts Receivables are $1,552 + $54 = $1,606 mn
- 2013 – Net receivables is $1,636 mn, allowance is $67 mn; This implies Gross Accounts Receivables are $1,636 + $67 = $1,703 mn
#4 – Inventory
Inventory means the goods and the material that is in stock. There are three Types of Inventory – Raw material inventory, work in progress inventory, and finished goods inventory.
source: Colgate SEC Filings
We note that Colgate’s raw material inventoryRaw Material InventoryRaw materials inventory is the cost of products in the inventory of the company which has not been used for finished products and work in progress inventory. Raw material inventory is part of inventory cost which is reported under current assets on the balance sheet.read more was $266 million, Work in progress inventory was $42 million, and Finished Goods inventory was at $863 million in 2016.
#5 – Prepaid expenses
These are exactly what they sound like. If a company pays a $10 million insurance premium on the last day of the month in excel that will provide coverage for the entire month, the company will record a $10 million prepaid expense to account for the insurance expense it will show in the month that it already paid for.
source: Google SEC filings
We note from above that Google’s Prepaid revenue share, expenses, and other assets have increased from $3,412 million in December 2014 to $37,20 million in March 2015.
#6 – Non-trade Receivables
Non-trade receivables are the receivables to be paid by employees, vendors, or other entities/persons for non-trade activities. Employees can owe loans or salary advances to the Company; vendors can owe the Company some prepaid deposits, tax authorities owe tax refunds, insurance claimsInsurance ClaimsAn insurance claim refers to the demand by the policyholder to the insurance provider for compensating losses incurred due to an event covered by the policy. The company either validates or denies the claim based on their assessment and nature of the incurred losses.read more by insurance Company are all examples of non-trade receivables. If these claims by the Company are to be matured or paid within one year, they are entered as non-trade receivables under current assets.
#7 – Other Current Assets
Other current assetsOther Current AssetsOther current assets refer to the category of assets which record all the uncommon and insignificant assets readily convertible into cash and doesn't fit in any common current assets categories like cash & cash equivalents, inventory, trade receivables, etc.read more include any other assets held by the Company, which can be converted to cash in one year but cannot be classified under the above-mentioned categories. Details of other assets held by the Company are generally provided in the notes to the financial statementsThe Financial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more.
Current Assets Example
Consider the consolidated balance sheet of Apple.com for the year ended September 2018
Source: Apple Inc.
The total current assets of the Company increased by 2.09% from $ 128,645 Mn to $ 131,339 Mn in 2017 and 2018, respectively.
We note the following about Apple’s Short Term Assets
- The cash and cash equivalents in the case of Apple Inc. increased from $ 20,289 Mn to $ 25,913 Mn from 2017 to 2018, respectively.
- The investment in marketable securities for Apple Inc. decreased from $ 53,892 Mn to $ 40,388 Mn from 2017 to 2018, respectively.
- The net account receivables for Apple Inc. increased from $ 17,874 Mn to $ 23,186 Mn from 2017 to 2018, respectively.
- Inventories for Apple Inc. decreased from $ 4,855 Mn in 2017 to $ 3,956 Mn in 2018.
- Apple Inc. did not have any prepaid expenses.
- Apple. Inc. has vendor non-trade receivables of $ 17,799 Mn in 2017, which increased to $ 25,809 Mn in 2018.
- Apple Inc.’s other current assets decreased from $ 13,936 Mn in 2017 to $ 12,087 Mn in 2018.
Conclusion
Current Assets can be defined as a firm’s ability to convert the value of all assets into cash within a year. If a company has cash, short-term investments, and cash equivalents, they would be able to generate better returns just by using such Assets. It can range from businesses like retail, Pharmaceuticals, or oil depending upon its nature.
Even the value of a firm, the financial health of a firm is determined by a company’s current assets. That’s why using such Assets makes it a great way to evaluate a firm’s ability to provide funding to its operations.
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