Current Asset

Definition of Current Asset

A current asset is a resource owned by a company that it expects to convert into cash, sell, or consume within one business cycle (usually one year). These assets play a critical role in the day-to-day operations of a business, providing the necessary liquidity to meet short-term obligations and support ongoing operations.

Examples of Current Assets

1. Cash and Cash Equivalents

• Description: The most liquid assets, including currency, bank accounts, and short-term investments that can be quickly converted into cash.
• Example: Company ABC holds $100,000 in a checking account, $50,000 in a savings account, and $25,000 in Treasury bills.

2. Accounts Receivable

• Description: Amounts owed to the company by customers for products or services delivered on credit.
• Example: Company XYZ has issued invoices totalling $75,000 to clients, due within 30-60 days.

3. Inventory

• Description: Goods available for sale or raw materials used in production.
• Example: Retailer DEF has $200,000 worth of electronics in stock for sale.

4. Prepaid Expenses

• Description: Payments made in advance for services or goods to be received in the future.
• Example: Company GHI pays $10,000 in advance for a year’s worth of insurance coverage.

5. Marketable Securities

• Description: Short-term investments that can be easily converted into cash, such as stocks and bonds.
• Example: Company JKL holds $30,000 in short-term government bonds.

Frequently Asked Questions (FAQs)

What is the significance of current assets on a balance sheet?

Current assets represent the liquidity of a business and its ability to cover short-term liabilities. A healthy amount of current assets indicates strong financial stability.

How are current assets different from non-current assets?

Current assets are expected to be liquidated or consumed within one year, while non-current assets are long-term investments that will not be converted into cash within the year.

Can intangible assets be considered current assets?

No, intangible assets like patents and trademarks are typically classified as non-current assets since they are not expected to be converted into cash within a year.

Why are prepaid expenses considered current assets?

Prepaid expenses are considered current assets because they represent services or goods that will benefit the company within the fiscal year.

What is the quick ratio and how does it relate to current assets?

The quick ratio is a financial metric that measures a company’s ability to meet its short-term obligations using its most liquid assets (excluding inventory). It is calculated as (Cash + Cash Equivalents + Accounts Receivable) / Current Liabilities.

Are warehouse supplies classified as current assets?

Yes, if they are expected to be used within a year, they can be considered current assets.

Related Terms

Non-current Asset

• Definition: Long-term investments and assets not expected to be converted into cash within one year, such as property, plant, and equipment (PP&E).

Liquidity

• Definition: The ability of an asset to be quickly converted into cash without significant loss of value.

Working Capital

• Definition: The difference between a company’s current assets and current liabilities, indicating the short-term financial health and operational efficiency of the business.

Accounts Receivable

• Definition: Money owed to a company by its customers for goods or services sold on credit.

Inventory

• Definition: The raw materials, work-in-progress products, and finished goods that a company maintains for the purpose of resale.

Online References

1. Investopedia - Current Assets
2. Accounting Tools - Current Assets
3. Corporate Finance Institute - Current Assets

Suggested Books for Further Studies

1. “Financial Accounting” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso
2. “Accounting Principles” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso
3. “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
4. “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
5. “Accounting Made Simple: Accounting Explained in 100 Pages or Less” by Mike Piper

Fundamentals of Current Asset: Accounting Basics Quiz

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