See Also:
Current Liabilities
Fixed Assets
Chart of Accounts (COA)
Working Capital Analysis
Financial Ratios
Intangible Assets
Current Assets Definition
Current assets, defined as a category of assets on the balance sheet which are expected to be used within one year or one normal operating cycle of the business (whichever is longer), are commonly part of the measures of liquidity in a company. Other asset categories on the balance sheet may include: non-current assets (or long-term assets); investments; property, plant and equipment; intangible assets and other assets.
Current Assets Explanation
Current assets, explained as some of the most useful assets in a company, are very valuable. Examples of items considered current assets include cash, inventory and accounts receivable. Items within this category are listed in order of liquidity – the items most easily converted into cash are listed first, the items that would take longer to be converted into cash are listed last. Two key liquidity ratios, the current ratio and the quick ratio, are calculated using current assets items. Accounting and finance professionals believe they are some of the most important assets because they are useful in good times or bad.
Current Assets Formula
A concise current assets formula does not exist as expected. Rather, the current assets balance sheet account is compiled from several smaller accounts.
Current Assets = Cash + Bank accounts + Prepaid Expenses + Debtors +Accounts Receivable + Short Term Investment + Inventory This extends into the current ratio
Current Ratio = Current Assets / Current Liabilities Current Assets, current liabilities included, also form net working capital
Net Working Capital = Current Assets minus Current Liabilities
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Calculation
Calculate these assets by combining several smaller accounts, is a simple addition problem.
Current Assets = $100,000 + $25,000 + $2,500 + $4,000 + $15,000 + $20,000 + $75,000 = $241,500
Where:
Cash = $100,000
Bank Accounts = $25,000
Prepaid Expenses = $2,500
Debtors = $4,000
Accounts Receivable = $15,000
Short Term Investment = $20,000
Inventory = $75,000
Current Asset Example
Liz is the owner of an industrial smoothing company. Working mainly with floors, walls, and other warehouse and plant projects, Liz has broken boundaries to start her company and rise to success. As with many industrial companies, Liz has taken out a bank loan. She now wants to make sure she is compliant and does not let her current assets fall under the required amount for her loan. Doing so would affect her relationship with the bank. Liz has her accountant perform these calculations. The accountant begins by taking a look at her financials. He finds the following:
Cash = $100,000
Bank Accounts = $25,000
Prepaid Expenses = $2,500
Debtors = $4,000
Accounts Receivable = $15,000
Short Term Investment = $20,000
Inventory = $75,000
He then performs this basic function:
$100,000 + $25,000 + $2,500 + $4,000 + $15,000 + $20,000 + $75,000 = $241,500
Conclusion
The accountant finds that Liz has current assets of $241,500. This is below the banks required amount of $245,000. Liz knows that her company is doing fine and that the bank merely keeps these levels as a protective measure. Still, Liz wants to keep true to the requirements of her loan and loan officer. She resolves to assemble her salespeople in a meeting and align them around the goal of increasing accounts receivable levels by $3,500. She knows this is possible by the next bank period.
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