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 assets 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. like cash & cash equivalents, accounts receivableAccounts ReceivableAccounts 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., 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., inventory, and prepaid expenses.
Some annual reports provide the detailed breakup of these items in the notes to the financial statements. 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).
The formula for OCA is calculated by deducting the major asset classes 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,
Examples of Other Current Assets
Let’s see some examples to understand it better.
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
Therefore, as per the available information of the balance, the OCA of XYZ Ltd stood at $30,000.
Now, let us take the example of Apple Inc.’s annual report 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
Again, the OCA as on September 30, 2017, can be calculated as,
= $128,645 – $20,289 – $53,892 – $17,874 – $4,855 – $17,799
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.
- Capturing all the short term assets, which are otherwise individually insignificant and uncommon, under a single category, makes the accounting process easier and simpler.
- 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 represents the expansion and contraction of the economy that occurs due to ups and downs in the gross domestic product (GDP) of a country. It is experienced over the long term and goes parallel with the natural growth rate. 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.
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.
This article has been a guide to Other Current Assets and its definition. Here we discuss practical examples of other current assets along with its advantages and disadvantages. You may learn more about accounting from the following articles –