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What is Current Assets Formula?
The formula for current assets is calculated by adding all the assets from the balance sheet that can be transformed into cash within a period of one year or less. Current assets primarily include cash, cash, and equivalents, account receivables, inventory, marketable securities, prepaid expenses, etc. Adding all these together, along with other such liquid assets, can help an analyst to understand the short term liquidity of a business.
It is noteworthy that usually, the result of the net current assets formula is listed on the company's balance sheet in the descending order of liquidity and cash being the most liquid form of the current asset i.e., easily convertible to cash. It is listed first. These short term assets are the vital components of a company's short term liquidity and net working capital requirement.
Current Assets Formula Explained
The current assets formula includes the company’s resources or tools through which the business is expected to convert into revenue or profits within a particular time frame, usually a fiscal year or a business cycle.
The most common current assets include cash, accounts receivables, inventory, and other short-term assets. Let us understand each of them in brief to ensure we interpret them correctly, as these shall be the building blocks on which our in-depth understanding of this concept shall be built.
Cash and Cash Equivalents: This refers to the physical currency held by the company from the sale of inventory or other such activities that generate physical cash. Cash equivalents are instruments that can be converted into physical cash at any given time, such as short-term investments.
Inventory: This is the tangible goods and/or materials that are held by the company that can generate the revenue and profits to run the business. They are often referred to as the lifeblood of any organization that is the foremost source of revenue generation.
Accounts Receivables: This is the amount that is owed to the organization or business by its clients and customers. This is placed under current assets as the company expects this amount to be received within the same financial year, as the credit period to clients is usually 45-90 days.
Other Short-Term Assets: These are assets other than the ones mentioned above that are forecasted to be converted into cash within the coming year. Examples of such current assets are short-term investments and prepaid expenses.
The application of the total current assets formula shows the liquidity status of the company to stakeholders and shareholders, if applicable. It also shows if the company is equipped enough to meet their short-term financial obligations and if the company has efficient cashflow management.
Formula
The Total Current Asset Formula is represented as,
How To Calculate?
The calculation of the net current assets formula can be derived by using the following two simple steps:
- Firstly, gather all the assets, which can be liquidated within a period of one year or less, from the balance sheet of the company. Such assets include cash, cash equivalents, inventory, marketable securities, accounts receivables, and prepaid expenses, other liquid assets, etc.
- Finally, the total current assets formula is calculated by adding up all the short term assets mentioned in the previous step.
Current Assets = Cash and Cash Equivalents + Accounts Receivables + Inventory + Marketable Securities + Prepaid Expenses + Other Liquid Assets
Examples
Let's see some simple to advanced examples to understand the calculation of the Total Current Assets Formula better.
Example #1
Let us consider an example to calculate the current assets of a company called XYZ Limited. As per the annual report of XYZ Limited for the financial year ended on March 31, 20XX.
The template below shows the data of XYZ Limited for the calculation of Current Assets for the financial year that ended on March 31, 20XX.
Current assets = Cash and Cash Equivalents + Accounts Receivable + Inventory + Marketable Securities + Prepaid Expenses.
So, the calculation of the Current Assets of XYZ Ltd., by using the above formula, can be as follows:
Therefore, Current Assets of XYZ Limited for the financial year ended on March 31, 20XXwill be :
=$100,000 + $40,000 + $12,000 + $33,000 + $6,000
The current assets of XYZ Limited for the year ended on March 31, 20XX is $191,000.
Example #2
Let us take the example of Walmart Inc.'s annual report for the fiscal year in January 2018.
The below template shows the data of Walmart Inc.'s for the fiscal year ending in January 2018.
Current assets (in USD Billions)=Cash and Cash Equivalents + Accounts Receivable + Inventory + Other current assets.
Therefore, the calculation for Current Assets of Walmart Inc.'s for the fiscal year ending in January 2018 can be:
Therefore, Current Assets of Walmart Inc.'s for the fiscal year ending in January 2018 will be,
=6.76 + 5.61 + 43.78 + 3.51
Current Asset of Walmart Inc.'s for the fiscal year ending in January 2018= $59.66
This means that Walmart Inc.'s current assets for the fiscal year ended in January 2018 stood at $59.66 Bn.
Example #3
Let us take the example of Microsoft Corp.'s annual report for the fiscal year in June 2018.
The below table shows the data and calculation of Microsoft Corp.'s annual report for the fiscal year in June 2018.
Current assets (in USD Billions)=Cash and Cash Equivalents + Accounts Receivable + Inventory + Other current assets.
Therefore, the current assets of Microsoft Corp. for the fiscal year ending in June 2018 will be:
=133.77 + 26.48 + 2.66 + 6.75
Current Assets of Microsoft Corp.'s for the fiscal year ending in June 2018 = $169.66
This means that Microsoft Corp.'s current assets for the fiscal year ended in June 2018 stood at $169.66 Bn.
Example of Current Assets Formula (with Excel Template)
Now let us take the case of Apple Inc. to illustrate the calculation of current assets in the Excel template below. The table provides a detailed calculation of the current assets for the financial year ending on September 29, 2018, and September 30, 2017.
The template below shows the data and calculation calculations of Apple Inc. for the financial year ending on September 29, 2018, and September 30, 2017.
Therefore, the calculation of the current assets of Apple Inc for the financial year ending on September 30, 2017, is,
=20,289 + 53,892 + 17,874 + 4,855 + 17,799 + 13,936 + 128,645
Current Assets of Apple Inc for the financial year ending on and September 30, 2017, will be:
Current Assets of Apple Inc for the financial year ending on September 30, 2017=128,645
Similarly, we can calculate the Current Assets of Apple Inc for the financial year ending on September 29, 2018, by using the above formula,
Current Assets of Apple Inc for the financial year ending on September 29, 2018=119,252
Relevance and Use
It is vital to understand the concept of net current asset formula as it is a key indicator of a company's short term financial health.
- The ideal ratio of the current assets to the current liabilities of the company should be between 1.25 to 2.00.
- In case, the current liabilities exceed the current assets, i.e., the ratio is less than 1. It means that the company's current assets are not enough to cover the current financial obligations adequately.
- Again, in case, the current assets exceed the current liabilities, i.e., the ratio is around 1.5, then the company has enough assets to pay off the short-term debts.
- On the other hand, having too much current assets can be seen as a bad thing as this indicates that the company is either not willing to or is unable to invest the profits into upcoming growth projects.
- Achievement of the correct balance of current assets and current liabilities can be a positive indicator to lenders and investors that the company has enough cash in hand for financial emergencies and that the company is investing the profits in the right kind of opportunities.
