Current Assets

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 sheetBalance SheetThe balance sheet is one of the three fundamental financial statements. These statements are key to both financial modeling and accounting. The balance sheet displays the company’s total assets, and how these assets are financed, through either debt or equity. The balance sheet: Assets = Liabilities + Equity are split into two categories – current assets and non-current assets (long-term or capital assets).

Current Assets vs. Long-term Assets

Examples of current assets include:

• Cash and cash equivalents
• Accounts receivableAccounts ReceivableAccounts Receivable (AR) represents the credit sales of a business, which are not yet fully paid by its customers, a current asset on the balance sheet. Companies allow their clients to pay at a reasonable, extended period of time, provided that the terms are agreed upon.
• Inventory
• Short-term investments
• Notes receivable
• Prepaid expenses (e.g., insurance premiums that have not yet expired)
• Marketable securities

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

• • Property, plant, and equipmentPP&E (Property, Plant and Equipment)PP&E (Property, Plant, and Equipment) is one of the core non-current assets found on the balance sheet. PP&E is impacted by Capex, Depreciation and Acquisitions/Dispositions of fixed assets. These assets play a key part in the financial planning and analysis of a company’s operations and future expenditures
  • Long-term investments
  • Intangible assetsIntangible AssetsAccording to the IFRS, intangible assets are identifiable, non-monetary assets without physical substance. Like all assets, intangible assets are those that are expected to generate economic returns for the company in the future. As a long-term asset, this expectation extends for more than one year (trademarks, patents, goodwill)
  • Deferred charges

Current Assets on a Balance Sheet

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

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 for the period ending January 31, 2017 is simply the addition of all the relevant assets ($57,689,000).

Important Ratios That Use Current Assets

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

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 debt 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.

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.

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.

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

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Related Readings

Thank you for reading this guide to current assets.  CFI’s mission is to create world-class financial analysts via the financial modeling & valuation Analyst Certification ProgramFMVA™ CertificationThe Financial Modeling & Valueation Analyst (FMVA)™ accreditation is a global standard for financial analysts that covers finance, accounting, financial modeling, valuation, budgeting, forecasting, presentations, and strategy. .  To continue learning and advancing your career, these additional resources will be helpful:

• Fixed Asset TurnoverFixed Asset TurnoverFixed Asset Turnover (FAT) is an efficiency ratio that indicates how well or efficiently the business uses fixed assets to generate sales. This ratio divides net sales into net fixed assets, over an annual period. The net fixed assets include the amount of property, plant, and equipment less accumulated depreciation
• Current RatioFinanceCurrent 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).
• Profitability RatiosProfitability RatiosProfitability ratios are financial metrics used by analysts and investors to measure and evaluate the ability of a company to generate income (profit) relative to revenue, balance sheet assets, operating costs, and shareholders' equity during a specific period of time. They show how well a company utilizes its assets
• Projecting Balance Sheet ItemsProjecting Balance Sheet Line ItemsProjecting balance sheet line items involves analyzing working capital, PP&E, debt share capital and net income. This guide will break down step-by-step how to calculate and then forecast each of the line items necessary to forecast a complete balance sheet and build a 3 statement financial model.