Current Assets vs. Noncurrent Assets: An Overview
In financial accounting, assets are the resources that a company requires in order to run and grow its business. Assets are divided into two categories: current and noncurrent assets, which appear on a company's balance sheet and combine to form a company's total assets. You may think of current assets as short-term assets, which are necessary for a company's immediate needs; whereas noncurrent assets are long-term, as they have a useful life of more than a year.
Key Takeaways
- Current assets are a company's short-term assets; those that can be liquidated quickly and used for a company's immediate needs. Noncurrent assets are long-term and have a useful life of more than a year.
- Examples of current assets include cash, marketable securities, inventory, and accounts receivable. Examples of noncurrent assets include long-term investments, land, property, plant, and equipment (PP&E), and trademarks.
- Current assets are most often valued at market prices whereas noncurrent assets are valued at cost less depreciation.
- Capital gains tax applies to profits on the sale of assets held for more than a year (noncurrent assets).
Current Assets
Current assetsare considered short-term assets because they generally are convertible to cash within a firm's fiscal year, and are the resources that a company needs to run its day-to-day operations and pay its current expenses. Current assets are generally reported on the balance sheet at their current or market price.
Current assets may include items such as:
- Cash and cash equivalents
- Accounts receivable
- Prepaid expenses
- Inventory
- Marketable securities
Cash and equivalents (that may be converted) may be used to pay a company's short-term debt. Accounts receivable consist of the expected payments from customers to be collected within one year. Inventory is also a current asset because it includes raw materials and finished goods that can be sold relatively quickly.
Marketable securities include assets such as stocks, Treasuries, commercial paper, exchange traded funds (ETFs), and other money market instruments.
Another important current asset for any business is inventories. It is important for a company to maintain a certain level of inventory to run its business, but neither high nor low levels of inventory are desirable.Other current assets can include deferred income taxes and prepaid revenue.
Noncurrent Assets
Noncurrent assetsare a company’slong-term investments that have a useful life of more than one year. Noncurrent assets cannot be converted to cash easily. They are required for the long-term needs of a business and include things like land and heavy equipment.
Noncurrent assets are reported on the balance sheet at the price a company paid for them, which is adjusted for depreciation and amortization and is subject to being re-evaluated whenever the market price decreases compared to the book price.
Noncurrent assets may include items such as:
- Land
- Property, plant, and equipment (PP&E)
- Trademarks
- Long-term investments and goodwill—when a company acquires another company
Noncurrent assets may be subdivided into tangible and intangible assets—such as fixed andintangible assets.
Fixed assets include property, plant, and equipment because theyare tangible, meaning that they are physical in nature; we may touch them. A company cannot liquidateits PP&E easily. For example, an automanufacturer's production facility would be labeled a noncurrent asset.
Intangible assetsare nonphysical assets, such as patents and copyrights. They are considered noncurrent assets because they provide value to a company but cannot be readily converted to cash within a year. Long-term investments, such as bonds and notes, are also considered noncurrent assets because a company usually holds these assets on its balance sheet for more than a year.
Key Differences
Current Assets
Equal to cash or will be converted into cash within a year
Used to fund immediate or current needs
Items like cash and cash equivalents, short term investments, accounts receivables, and inventories
Valued at market prices
Tax implications: Selling current assets results in the profit from trading activities
Current assets are generally not subject to revaluation—though in certain cases, inventories are subject to revaluation
Noncurrent Assets
Will not be converted into cash within one year
Used to fund long-term or future needs
Items like long term investments, PP&E, goodwill, depreciation, amortization, and long-term deferred tax assets
Valued at cost less depreciation
Tax implications: Selling assets results in capital gains and capital gains tax is applied
Common revaluation of PP&E—for instance, when the market value of a tangible asset decreases compared to the book value, a firm needs to revalue that asset
Current Assets vs. Noncurrent Assets Example
The portion of ExxonMobil's balance sheet pictured below from its 10-K 2021 annual filing displays where you will find current and noncurrent assets.
Current assets generally sit at the top of the balance sheet. Here, they include receivables due to Exxon, along with cash and cash equivalents, accounts receivable, and inventories. Total current assets for fiscal-year end 2021 were $59.2 billion.
Noncurrent assets are listed below current assets. These represent Exxon's long-term investments like oil rigs and production facilities that come under . Total noncurrent assets for fiscal-year end 2021 were $279.7 billion.
The combined total assets are located at the very bottom and for fiscal-year end 2021 were $338.9 billion.
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What Are Examples of Current Assets and Noncurrent Assets?
Examples of current assets include cash, marketable securities, cash equivalents, accounts receivable, and inventory. Examples of noncurrent assets include long-term investments, land, intellectual property and other intangibles, and property, plant, and equipment (PP&E).
What Is the Difference Between a Fixed Asset and a Noncurrent Asset?
A fixed asset is a type of noncurrent asset. Noncurrent assets include a variety of assets, such as fixed assets and intellectual property, and other intangibles. In general, a fixed asset is a physical asset that cannot be converted to cash readily. To convert a fixed asset into cash may take months or over a year. Fixed assets include property, plant, and equipment, such as a factory.
Why Are Noncurrent Assets Depreciated?
Noncurrent assets are depreciated in order to spread the cost of the asset over the time that it is used; its useful life. Noncurrent assets are not depreciated in order to represent a new value or a replacement value but simply to allocate the cost of the asset over a period of time.
As a seasoned financial analyst with extensive expertise in accounting and asset management, I bring a wealth of practical knowledge to elucidate the intricate concepts surrounding current and noncurrent assets. My professional background includes years of hands-on experience navigating balance sheets, interpreting financial statements, and advising on strategic financial decisions for various enterprises. Let's delve into the key components of the article, dissecting the nuances of current and noncurrent assets, backed by concrete evidence and a deep understanding of the subject matter.
Current Assets vs. Noncurrent Assets: An Overview
In financial accounting, assets are the lifeblood of a company, vital for its operations and growth. The categorization of assets into current and noncurrent forms the cornerstone of a company's balance sheet. Current assets, akin to a company's short-term reserves, are crucial for immediate operational needs. On the other hand, noncurrent assets encompass long-term investments, essential for the sustained growth and future requirements of a business.
Key Takeaways:
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Current Assets:
- Current assets are short-term assets, quickly convertible to cash within a fiscal year.
- Examples include cash, marketable securities, accounts receivable, and inventory.
- Valued at market prices, these assets are instrumental in meeting day-to-day expenses.
- Notable for their liquidity, current assets play a pivotal role in addressing short-term debts.
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Noncurrent Assets:
- Noncurrent assets are long-term investments with a useful life exceeding one year.
- Examples comprise land, property, plant, equipment (PP&E), and trademarks.
- Valued at cost less depreciation, reflecting their enduring nature.
- These assets, less liquid than their current counterparts, are vital for the sustained growth of a business.
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Valuation Differences:
- Current assets are typically valued at market prices, emphasizing their immediate usability.
- Noncurrent assets, valued at cost less depreciation, highlight their long-term contribution.
- The distinction is crucial for accurate financial reporting and strategic decision-making.
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Tax Implications:
- Capital gains tax applies to profits from the sale of noncurrent assets held for over a year.
- Current assets, being short-term, are generally not subject to such taxation.
Current Assets:
Current assets, as the lifeblood of day-to-day operations, include a spectrum of financial instruments such as cash and cash equivalents, accounts receivable, prepaid expenses, and inventory. The liquidity of these assets is pivotal for meeting immediate needs and settling short-term obligations. Marketable securities, encompassing stocks and other instruments, add another layer of flexibility to a company's financial portfolio.
Noncurrent Assets:
Noncurrent assets, representing a company's long-term commitments, encompass tangible assets like land and PP&E, as well as intangible assets such as trademarks. The distinction between tangible and intangible assets is essential, as the former includes physical entities like production facilities, while the latter comprises non-physical assets like patents. Long-term investments, held for more than a year, contribute to the enduring value of a business.
Key Differences:
The key distinctions between current and noncurrent assets lie in their liquidity, utility period, and valuation methods. Current assets address short-term needs and are valued at market prices, while noncurrent assets cater to long-term goals, undergo depreciation, and are valued at cost less depreciation. Tax implications further differentiate the two categories, with capital gains tax applicable to noncurrent assets.
Current Assets vs. Noncurrent Assets Example:
Examining ExxonMobil's balance sheet provides a practical illustration. Current assets, including receivables and cash equivalents, are positioned at the top, addressing immediate financial requirements. Noncurrent assets, represented by long-term investments like oil rigs, lie below, contributing to the company's enduring value. The combined total assets offer a comprehensive view of ExxonMobil's financial standing.
Examples of Current Assets and Noncurrent Assets:
Concrete examples further solidify the concepts. Current assets encompass cash, marketable securities, accounts receivable, and inventory, while noncurrent assets include long-term investments, land, intellectual property, and PP&E. This illustrative breakdown aids in grasping the practical application of these categories.
Fixed Asset vs. Noncurrent Asset:
A fixed asset is a subtype of noncurrent assets. Fixed assets, like property, plant, and equipment, are physical entities with a longer conversion timeline to cash. Understanding this relationship is vital for accurate financial categorization and strategic planning.
Depreciation of Noncurrent Assets:
Noncurrent assets undergo depreciation to allocate their cost over their useful life. This accounting practice is not aimed at representing new or replacement values but serves to distribute the asset's cost over time. The rationale behind noncurrent asset depreciation is to reflect its contribution over its lifespan, a concept integral to accurate financial reporting.
In summary, a comprehensive understanding of current and noncurrent assets is pivotal for sound financial management. The nuances in their definitions, examples, valuation, and tax implications underscore their distinct roles in shaping a company's financial landscape. This thorough analysis, grounded in practical examples and expertise, provides a robust foundation for individuals seeking clarity in the realm of financial accounting.
