Current Assets

All assets that can be reasonably converted to cash within one year

What are Current Assets?

Current assets are all assets that can be reasonably converted to cash within one year. They are commonly used to measure the liquidity of a company. A company’s assets on its balance sheet are split into two categories – current assets and non-current assets (long-term or capital assets).

 

Current Assets

 

Current Assets vs. Long-term Assets

Examples of current assets include:

  • Cash and cash equivalents
  • Accounts receivable
  • Inventory
  • Short-term investments
  • Notes receivable
  • Prepaid expenses (ex. insurance premiums that have not yet expired)
  • Marketable securities

 

On the other hand, long-term assets (also known as capital assets) take a longer time and are more difficult to convert into cash. Examples of long-term assets include:

 

Current Assets on a Balance Sheet

For example, consider the balance sheet of Walmart for the period ending January 31, 2017:

 

Current Assets - Table

 

Note that the (current) assets are clearly separated in order of liquidity. Cash and cash equivalents are the most liquid, followed by short-term investments, etc. The total current assets for Walmart period ending January 31, 2017 is simply the addition of all the relevant assets ($57,689,000).

 

Total Current Assets

 

Important Ratios That Use Current Assets

Below is a list of useful liquidity-measuring ratios that can be calculated with current assets:

  1. The Cash Ratio is a liquidity ratio used to measure a company’s ability to meet short-term liabilities. The cash ratio is a conservative ratio since it only uses cash and cash equivalents. This ratio shows the company’s ability to repay current liabilities without having to sell or liquidate other assets.

 

Cash Ratio

 

2. The Quick Ratio, also known as the acid-test ratio, is a liquidity ratio used to measure a company’s ability to meet short-term financial liabilities. The quick ratio uses (current) assets that can be reasonably converted to cash within 90 days.

 

Quick Ratio

 

3. The Current Ratio is a liquidity ratio used to measure a company’s ability to meet short-term and long-term financial liabilities. The current ratio uses all of the company’s (current) assets in the calculation.

 

Current Ratio

 

It is important to note that the current ratio can overstate liquidity. Current ratio uses inventory, which may or may not be easily converted within a year (this is the case for many retailers and other inventory-intensive businesses).

 

Related Readings

Thank you for reading this guide.  CFI’s mission is to create world-class financial analysts via the financial modeling & valuation Analyst Certification Program.  To continue learning and advancing your career, these additional resources will be helpful:

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