What are Short Term Assets?
Short term assets (also known as current assets) are those assets that are highly liquid and can be easily sold to realize money from the market, typically within one year. Such short term assets have a maturity of fewer than 12 months and are highly tradeable and marketable in nature.
List of Short Term Assets Examples
The following are the various components of short term assets:
#1- Cash and Cash Equivalents
Cash and cash equivalentsCash And Cash 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. are the liquid cash that is present in the current balance sheet of the companyBalance Sheet Of The CompanyA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.. It also consists of a certificate of depositsCertificate Of DepositsCertificate of deposit (CD) is a money market instrument issued by a bank to raise funds from the secondary money market. It is issued for a specific period for a fixed amount of money with a fixed rate of interest. It is an arrangement between the depositor of money and the bank. and cash in hand and cash at bank.
#2- Debtors or Accounts Receivables
Debtors or 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. are the unpaid money of the company, against which invoice has been raised, but the money has not yet been furnished to the company. That is why it is an asset for the company and has its certification and payment cycle.
#3- Prepaid Expenses
Prepaid Expenses are those expense by the company which is paid in advance and are paid for a future period. That is the reason it is showing as an asset to the company. Examples of prepaid expensesExamples Of Prepaid ExpensesPrepaid expense examples will provide an idea of the various payments made by the company in advance for those goods or services which will be procured in future. Some of these include prepaid rent, advance salary and prepaid insurance. are Office rent, which is generally paid in full for the quarter or a year as per the lease agreement.
#4- Short term Investments
When the company has idle cash sitting on its balance sheet, the company is forgoing the opportunity costOpportunity CostThe difference between the chosen plan of action and the next best plan is known as the opportunity cost. It's essentially the cost of the next best alternative that has been forgiven. of investment for that idle cash. So the company opts to invest the unused money in various short term ventures such as mutual funds or demand depositsDemand DepositsMoney deposited with a bank or financial institution that can be withdrawn without notice is known as a demand deposit. Due to the shorter lock-in time, it does not pay any interest or a nominal amount of interest. in order to invest the money and utilize it.
Advantages of Short Term Assets
- They are highly liquid and are used for the working capital management of the companyWorking Capital Management Of The CompanyWorking Capital Management refers to the management of the capital that the company requires for financing its daily business operations. It is important for the company in order to maximize its operational efficiency, manage its short term liabilities and assets properly, avoiding the underutilization of the resources and avoiding the overtrading, etc..
- They are used for ratio analysis and peer group analysis. It also tells about what is the liquidity state of the company and how the liquid is the company is for repaying it’s short term obligations.
- Having a good amount of current assets in the balance sheet of the company makes the company liquid in nature. Also, it tells us about the plans of the company as more cash, and more retained earningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company. are used for the future and further investment in the future goals of the company.
- Current or short terms assets are highly convertible and usable. They are of physical existence and are tangible.
Disadvantages of Short Term Assets
- Too much portion of the balance sheet is tied up in the current assets; it can be a sign of bad financial health of the company.
- Too much capital stuck in the current assets of the company signifies the inefficient working capital of the company, and the company is not making proper use of its current assets. It can cause a loss of market share and business.
- Short Term Assets are highly liquid, which makes them a good portion for analysis as any company cannot afford to have too many current assets in their balance sheet especially cash in hand and cash at bank.
Hence, careful analysis of short term assets is highly necessary in order to keep a company operating efficiently. Also, current assets are highly used in ratio analysisRatio AnalysisRatio analysis is the quantitative interpretation of the company's financial performance. It provides valuable information about the organization's profitability, solvency, operational efficiency and liquidity positions as represented by the financial statements. of the company, which tells the user where the company is standing in comparison with its global peers.
This article has been a guide to what are Short Term Assets and its definition. Here we discuss the top 4 short term assets along with example and explanation. We also discuss its advantages & disadvantages. You may learn more about Corporate Finance from the following articles –