What are Other Current Assets?
Other current assets are the assets of the business that are not very common and significant like cash & cash equivalents, inventory, trade receivable, etc. and expect to be converted into cash within 12 months of the reporting date.
In simple words, it is a balance sheet line item that represents all the 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.read more that are considered to be too insignificant to be recognized individually. They are specifically denoted as “other” because they are either inconsequential or fairly uncommon, unlike typical current assetsCurrent AssetsCurrent 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.read more like cash & cash equivalents, accounts receivableAccounts ReceivableAccounts 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. read more, 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, inventory, and prepaid expensesPrepaid ExpensesPrepaid expenses are expenses for which the company paid in advance in an accounting period but which were not used in the same accounting period and have yet to be recorded in the company's books of accounts.read more.
Some annual reports provide the detailed breakup of these items in the notes to the financial statementsFinancial 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. As such, one should always refer the notes if the figures exhibit significant variation or are significantly large enough in entirety (although not significant individually).
Formula
The formula for OCA is calculated by deducting the major asset classesAsset ClassesAssets are classified into various classes based on their type, purpose, or the basis of return or markets. Fixed assets, equity (equity investments, equity-linked savings schemes), real estate, commodities (gold, silver, bronze), cash and cash equivalents, derivatives (equity, bonds, debt), and alternative investments such as hedge funds and bitcoins are examples.read more under current assets, such as cash & cash equivalents, accounts receivable, marketable securities, inventory, and prepaid expenses, from total current assets.
Mathematically, it is represented as,
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For eg:
Source: Other Current Assets (wallstreetmojo.com)
Examples of Other Current Assets
Let’s see some examples to understand it better.
Example #1
Let us take the example of company XYZ Ltd that had recently published its annual report. The following excerpt of the balance was made available:
- Cash & Cash Equivalents – $50,000
- Accounts Receivable – $100,000
- Marketable Securities – $15,000
- Inventory – $80,000
- Prepaid Expenses – $25,000
- Total Current Assets – $300,000
Determine the OCA based on the given information.
The Calculation of OCA can be done by using the above formula as,
= $300,000 – $50,000 – $15,000 – $100,000 – $80,000 – $25,000
= $30,000
Therefore, as per the available information of the balance, the OCA of XYZ Ltd stood at $30,000.
Example #2
Now, let us take the example of Apple Inc.’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.read more as on September 29, 2018. The following information is available and, based on that, determine the change in OCA during the last one year.
The OCA as on September 29, 2018, can be calculated using the above formula as,
= $131,339 – $25,913 – $40,388 – $23,186- $3,956 – $25,809
= $12,087
Again, the OCA as on September 30, 2017, can be calculated as,
= $128,645 – $20,289 – $53,892 – $17,874 – $4,855 – $17,799
= $13,936
So, the OCA for Apple Inc. has decreased from $13,936 Mn to $12,087 in the last one year. However, the reason behind the variation is not known as we do not have a detailed breakup.
Advantages
- Capturing all the short term assets, which are otherwise individually insignificant and uncommon, under a single category, makes the accounting process easier and simpler.
Disadvantages
- Lack of clarity as some of the companies do not provide a detailed breakup of the items included under.
- Any asset item that has outgrown the period of one year or one business cycleOne Business CycleThe business cycle refers to the alternating phases of economic growth and decline.read more should be reclassified under any long term asset class. However, there are occasions when such assets are overlooked and erroneously continued under OCA, which are its major disadvantages. The working capital requirement increases in such a case.
- At times, an increase in one asset is offset by a decrease in another asset within the OCA. In such a scenario, there will hardly be any significant variation in the totality, and as such, the variation in the individual assets is overlooked.
Conclusion
So, we can conclude that even though OCA comprise of asset items that are too little to impact the financial position of a company, the individual items cannot be entirely overlooked as it can affect several liquidity ratios if captured erroneously.
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