Current Assets

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Current Assets Definition

Current assets are expected to be consumed, sold, or converted into cash either in one year or in the operating cycle, whichever is longer. They are usually presented in order of liquidity on the balance sheet and include cash and cash equivalents, accounts receivables, inventory, prepaid, and other short-term assets.

Current Assets
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List of Current Assets

It includes the following -

  1. Cash and Cash Equivalents
  2. Marketable Securities
  3. Account Receivables
  4. Inventory/Stock
  5. Prepaid Expenses
  6. Non-Trade Receivables
  7. Other Current Assets

Let us discuss these in detail -

Current Assets List.jpg

#1 - Cash and Cash Equivalents

Companies need cash to run their day to day operations. Cash usually includes checking accounts, coins and paper money, undeposited receipts, and money orders.

The excess cash is normally invested in low risk and highly liquid instruments to generate additional income. It is called cash equivalents. Cash Equivalents may include commercial paper, money market mutual funds, bank certificate of deposits, and treasury securities.

Cash and Cash Equivalents

Look at Microsoft 2007 Balance Sheet Assets – What is the % of cash & short-term investments as a % of "Total Assets."

Cash and Cash Equivalents

As we note from above, MacDonald's percentage of cash and short-term investments to Total Assets was 58.28% in 2007 and 69.7% in 2006.

#2 - Marketable Securities

microsoft-breakup-of-marketable-securities

Marketable securities are securities that are heavily traded on public exchanges. The buyers for these securities are readily available. Hence they are short-term assets. Marketable securities are of two types – Equity and debt securities.

#3 - Accounts Receivables

The credit given to the customer is known as Accounts Receivables. It means that the company has rendered services or delivered the product to the customer. However, it has not collected the cash fully yet.

Colgate Net Receivables

In Colgate, we note the following –

  • 2014 – Net receivables is $1,552 mn, allowance is $54 mn; This implies Gross Accounts Receivables are $1,552 + $54 = $1,606 mn
  • 2013 – Net receivables is $1,636 mn, allowance is $67 mn; This implies Gross Accounts Receivables are $1,636 + $67 = $1,703 mn

#4 -  Inventory

Inventory means the goods and the material that is in stock. There are three Types of Inventory - Raw material inventory, work in progress inventory, and finished goods inventory.

Inventory

source: Colgate SEC Filings

We note that Colgate's raw material inventory was $266 million, Work in progress inventory was $42 million, and Finished Goods inventory was $863 million in 2016.

#5 - Prepaid expenses

These are exactly what they sound like. Suppose a company pays a $10 million insurance premium on the that will provide coverage for the entire month. In that case, the company will record a $10 million prepaid expense to account for the insurance expense it will show in the month that it already paid for.

Current Assets Example - Prepaid expense

source: Google SEC filings

We note above that Google's Prepaid revenue share, expenses, and other assets have increased from $3,412 million in December 2014 to $37,20 million in March 2015.

#6 - Non-trade Receivables

Non-trade receivables are the receivables paid by employees, vendors, or other entities/persons for non-trade activities. Employees can owe loans or salary advances to the Company; vendors can owe the Company some prepaid deposits, tax authorities owe tax refunds, insurance claims by insurance companies are all examples of non-trade receivables. If these claims by the Company are to be matured or paid within one year, they are entered as non-trade receivables under current assets.

#7 - Other Current Assets

Other current assets include any other assets held by the Company, which can be converted to cash in one year but cannot be classified under the above categories. Details of other assets held by the Company are generally provided in the notes to the financial statements.

List of Current Assets Video

Current Assets Example

Consider the consolidated balance sheet of Apple.com for the year ended September 2018

Apple Balance Sheet

Source: Apple Inc.

The company's total current assets increased by 2.09% from $ 128,645 Mn to $ 131,339 Mn in 2017 and 2018, respectively.

We note the following about Apple's Short Term Assets

  • The cash and cash equivalents in the case of Apple Inc. increased from $ 20,289 Mn to $ 25,913 Mn from 2017 to 2018, respectively.
  • The investment in marketable securities for Apple Inc. decreased from $ 53,892 Mn to $ 40,388 Mn from 2017 to 2018, respectively.
  • The net account receivables for Apple Inc. increased from $ 17,874 Mn to $ 23,186 Mn from 2017 to 2018, respectively.
  • Inventories for Apple Inc. decreased from $ 4,855 Mn in 2017 to $ 3,956 Mn in 2018.
  • Apple Inc. did not have any prepaid expenses.
  • Apple. Inc. has vendor non-trade receivables of $ 17,799 Mn in 2017, which increased to $ 25,809 Mn in 2018.
  • Apple Inc.'s other current assets decreased from $ 13,936 Mn in 2017 to $ 12,087 Mn in 2018.

Conclusion

Current Assets can be defined as a firm's ability to convert the value of all assets into cash within a year. It can range from businesses like retail, Pharmaceuticals, or oil, depending upon its nature. If a company has cash, short-term investments, and cash equivalents, it will generate better returns by using such Assets.

Even the value of a firm, the financial health of a firm is determined by a company’s current assets. Using such Assets makes it a great way to evaluate a firm's ability to provide funding to its operations.