CURRENT ASSETS: Definition and Examples

You’re starving, and someone offers you a choice between a hot dinner and the means to prepare your own. Of course, you’ll take the warm food when offered because you don’t have time to prepare your own supper. Similar in nature, current assets can be utilized immediately and obtained with ease. So, what exactly are current assets? Continue reading as we explain all you need to know about inventory current assets and their formula.

What Are Current Assets?

The Current Assets account is a very important part of a company’s balance sheet. The account includes all of the company’s important assets that the company could turn into cash within a year. It keeps track of valuable assets known as current assets. We call these assets “current assets” because they can be easily converted into cash within a year or less. Current assets include cash, accounts due, inventory, and costs that have already been paid for. Also, by putting these assets in the Current Assets account, a business can easily keep track of and handle its short-term money.

In finance and accounting, companies use present assets as valuable assets that they can use right away. You can easily turn these assets into cash or expect to use them up quickly, usually within a year. Current assets include cash on hand, cash counterparts, accounts due, stock inventory, and other liquid assets. These assets are very important to an organization’s financial health and productivity because they give it the cash it needs to meet short-term commitments and take advantage of new opportunities.

Types of Current Assets

The various types of current assets include the following:

#1. Inventory

Examples of inventory that can be found on a balance sheet include finished items, WIP, raw materials, and commodities. However, you should classify stock expected to be held for more than a year as a non-current asset, as not all inventories qualify as current assets.

#2. Supplies

Supplies are considered current assets until they are used, at which point they are considered costs. Unused commodities should be listed as current assets by businesses.

#3. Cash and Cash Equivalents

Simply put, cash is the amount of money that is currently in your bank account. On the other hand, cash equivalents include short-term savings loans, short-term investments, and other currencies that can be quickly converted into cash.

#4. Marketable Securities

Trading on public markets allows investors to quickly convert marketable securities into cash. This category includes cryptocurrency and other readily transferable assets, as well as traditional marketable securities and short-term investments.

#5. Costs in Advance

Expenses that have already been paid for but whose benefits will not be realized for some time are considered prepaid. You have prepaid expenses if you have paid for a year’s worth of rent or extended insurance coverage. Incorporate these into earnings for the time period that the payout applies to.

#6. Accounts Receivable

Accounts receivable include all money owed to your company by customers. It’s the money people owe you for services you’ve previously provided or products you’ve already shipped.

#7. Diverse Monetary Assets

Basically, this is the umbrella term. Other current assets that can be exchanged for cash within a year (such as mortgages or tax refunds, for example) should be listed here if they do not fall into any of the aforementioned categories.

How Do Investors Use Current Assets?

When it comes to running a business day-to-day, the number that shows the total current assets is very important for company management. In order for finances to run smoothly, it is important for management to have enough cash on hand to pay bills and loans when they are due. In a company’s financial account, the total current assets number tells us a lot about its cash flow and liquidity. It shows how much the company’s current assets are worth. Current assets are things that the company expects to turn into cash within a year. By looking at this number, interested parties can learn more about the company’s ability to meet its short-term obligations and maintain a healthy amount of liquidity.

One of the best things about this system is that it makes it easy to move and sell goods quickly and efficiently, if and when that’s needed to keep business running smoothly. Creditors and investors keep a close eye on the Current Assets account to figure out if a business has enough money to meet its financial responsibilities. Both individuals and businesses use liquidity ratios to assess how well their finances are doing and whether they can pay their bills without borrowing money. These ratios are a type of financial metric that is used to figure out if a debtor will be able to meet their current financial responsibilities.

Examples of Current Assets

Now that we have gained a comprehensive understanding of the various types of current assets at our disposal, below are examples of current assets and their potential utilization for financing your business.

#1. Prepaid Expenses

The balance sheet categorizes the prepaid insurance premiums as a current asset. The term used to represent payments made in advance for insurance protection is called prepayment. Paying insurance premiums in advance of the time period that the payment will cover is a common practice. In most cases, you settle the total amount within a single calendar year. The rent falls under the category of current assets as another type of asset. When a rent payment is made before the scheduled time, it is called “prepaid rent.” The balance sheet categorizes it as a current asset due to its recent acquisition.

Your company will categorize the payment as a current asset until it starts using the office space or facility for which the payment was made during the specified time period. For instance, on the 30th of October, a company pays the rent on its office space for the month of November. When the office space is used starting on November 1st, categorize the payment as a cost because it was made in advance.

#2. Short-term Investments

Short-term investments, also known as cash equivalents, can easily be converted into cash as they are highly liquid assets. Cash equivalent assets include a diverse range of financial instruments, such as shares, bonds, deposit accounts, and mutual funds. These assets have high liquidity and can readily be converted into cash without incurring significant losses. Individuals and businesses can maintain a balance between liquidity and potential returns, ensuring their financial stability and flexibility, by investing in cash equivalents. Companies offer ownership in stocks, while governments or corporations issue debt obligations represented by bonds. Savings accounts offer a secure and easily accessible option for storing funds, while mutual funds

#3. Equipment

It is crucial to highlight that equipment is classified as a fixed, long-term asset rather than a current asset. Equipment refers to a wide range of machinery that is utilized for various operational purposes.

Additionally, it encompasses essential office equipment such as scanners, copiers, printers, and computers. Fixed assets are a crucial component of any business, as they are utilized over an extended period of time, typically exceeding one year. These assets, known for their long-term usage, play a vital role in the overall operations and success of an organization.

Current Assets Formula

The formula for calculating total current assets involves adding up all the assets that can be converted into cash within a year. You can add a certain subcategory of current assets under the category of Other Liquid Assets if it is not specifically listed in this formula. Gather and incorporate the most recent asset information from the balance sheet to build a complete assessment of an organization’s financial status. The balance sheet typically displays the determined whole amount in the area labeled “Total Current Assets.”

Current Assets= Cash+ Investment+ Account receivable+ Inventory

This is a rather simple equation. Simply add up all the cash and other assets that you can easily convert into cash over the course of a year.

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Inventory Current Assets

Inventory current assets encompass a comprehensive range of goods and services that a business provides for purchase by its esteemed customers. In addition to the final products, a company’s inventory encompasses not only the finished goods but also the essential raw materials and the ongoing work in progress.

Inventory, being classified as a current asset account, finds its rightful place on the balance sheet of a business. This financial statement, which also encompasses liabilities and owner’s equity, serves as a comprehensive snapshot of the company’s financial standing. In the pursuit of maintaining optimal inventory levels, business owners diligently strive to anticipate and predict consumer demand. Thus, by leveraging their expertise and market insights, they aim to strike a delicate balance between surplus stock and inventory shortages.

Is Inventory Always Considered a Current Asset?

Inventory is always a current asset on the balance sheet because the company will use it up or sell it within a year or the accounting period. But unsold and extra inventory can become a liability for the business if it has to pay to store it. Also, some items in stock have a short shelf life and can quickly go bad, become outdated, or lose their value. For example, there are foods that can go bad and technologies that can become outdated. You might have to sell the items at a loss or get rid of them altogether. Businesses can avoid this by not keeping too much inventory on hand.

On the other hand, having too little stock can cause shortages and hurt sales. It can hurt the business’s reputation by giving customers a bad experience. Businesses set up asset accounts so they can keep track of how much their stock is worth. These accounts can help you stay aware of how much inventory you have, how many things you have in stock, how much each item is worth, how long your business has been storing it, and how long it will last. Create a method for keeping track of your inventory that will save you both time and cash in the long run.

Types of Inventory Current Assets

As previously mentioned, inventory current assets comprise of three primary classifications, namely raw materials, work in progress, and the final product. Thus, they include the following:

#1. Raw Materials

Manufacturers purchase a variety of raw materials, including fabrics, metals, and wood in addition to electric motors, wiring, and microchips. Raw materials are essential for the production of goods and services and vary depending on the industry.

#2. Work in Progress

This category includes all products that are not in their final form or ready for retail sale. The components of a bicycle that have yet to be completed, uncooked pottery, and a partially sewn garment show us work in progress.

#3. Finished Goods

These items have reached the point of commercial viability. Anything from a cheap bag of chips to a high-end sports automobile fits this description.

Why Is Inventory a Current Asset?

Inventory is an ongoing asset because it is usually sold off within a year or even less. When thinking about liquidity, it’s important to keep in mind that inventory is somewhere in the middle of the range. Liquidity pertains to the inherent capability of a business to effectively convert its Although inventory is not as easily convertible to cash as highly liquid assets such as cash and cash equivalents, it nevertheless provides a higher level of liquidity than more illiquid assets such as land and machinery.

What Is Non-current Assets Inventory?

Unlike current assets, which are used up within a year, noncurrent assets are kept for the long haul. Cash, convertible securities, stock, and receivables are all examples of current assets. Long-term investments, real estate, PP&E, and trademarks are all examples of noncurrent assets.

Is Inventory a Current Asset or Cost of Goods Sold?

Inventory is classified as a current asset, which signifies its importance in a company’s financial standing. On the other hand, the cost of goods sold (COGS) does not fall under the asset category, as it represents the expenses incurred in the production process rather than a tangible resource. The Cost of Goods Sold (COGS) is a crucial expense that is subtracted from the total revenue generated by a business in order to calculate the net income.

Final Takeaway

A company’s capacity to turn its total asset value into usable cash within a year is the essence of its current assets. Depending on the specifics, this sector can include industries like commerce, pharmaceuticals, or oil. A corporation can earn higher returns from its Assets if it has cash on hand, short-term investments, and cash equivalents. A company’s current assets can tell you a lot about its future success and even its value. Thus, a company’s ability to fund its activities can be evaluated with the help of such Assets.

References

freshbooks.com
investopedia.com
deskera.com
shopify.com

CURRENT ASSETS: Definition and Examples

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What Are Current Assets?