Current Assets
In this article, Shruti CHAND (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2022) elaborates on current assets.
This read will help you get started with understanding current assets and how it is used in today’s world.
Introduction
Current asset refers to all the assets of a business that can be converted into cash with ease, usually within 12 months or less. These assets are also referred to as
liquid assets based on their nature and include items such as cash and cash equivalents, short-term investments, etc.
Current assets are important as the company needs liquid assets to pay for ongoing operational expenses.
Current Assets = Cash + Cash Equivalents + Inventory + Accounts receivable +
Marketable securities + Prepaid expenses + Other liquid assets.
All the current asset’s values are added up and recorded under the current assets the section on the balance sheet. Let us understand the following items represent the part of the current assets:
Cash, and cash equivalents
Are all the cash and its equivalents such as marketable securities, short term treasury bills/bonds.
Accounts receivable
It is the money due to a company for goods/services already delivered but not yet paid for. It is treated as current assets because they are expected to be received within a year. In case the money is never received/collected by the company, such entries are noted down as bad debts and are still recorded in the current assets section of the balance sheet.
Stock Inventory
This represents all the finished products or the lying raw materials with a firm. The company holds them until they are sold and is expected to be sold in the near future. There can be instances though, when inventory is not sold and the company’s inventory can be backlogged.
Prepaid Expenses
These represent the advance payments made by a firm for goods/services that it will receive in the future. Since the payment is already made, it allows the firm to free up capital for other uses, which is why they are recorded as current assets. These expenses usually include payments to insurance companies or service providers.
Marketable securities
These are liquid financial instruments that can be easily converted into cash. These short-term securities can be bought or sold on public stock exchanges. It includes common stock, treasury bills, and money market instruments.
Final Words
It isn’t necessarily a good thing to have a lot of cash on the balance sheet. If the company has debt and is sitting on a large amount of cash, it can portray an the unhealthy state of business or bad financial management.
Current assets allow the management of the company to make necessary arrangements to continue business operations. As an investor, one needs to keep an eye on the current assets to assess the risk in the business operations of the firm. You can use a variety of financial ratios related to liquidity to do the same, for example, current ratio, quick ratio, and cash ratio.
Related posts on the SimTrade blog
▶ Shruti CHAND Balance Sheet
▶ Shruti CHAND Accounts Receivable
▶ Shruti CHAND Current Assets
Relevance to the SimTrade certificate
This post deals with Current Assets which are used by various investors to study the financial health of a business:
About theory
- By taking the market orders course, you will know more about how investors can use various strategies to invest in order to trade in the market.
About practice
- By launching the series of Market maker simulations, you can extend your learning about financial markets and trading approaches.
About the author
Article written by Shruti CHAND (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2022).