When you look at a company's balance sheet, you'll see three categories: assets, liabilities, and owners' equity. The first section listed under the asset section of the balance sheet is called "current assets."
Current assets on the balance sheet include cash, cash equivalents, short-term investments, and other assets that can be quickly converted to cash—within 12 months or less. Because these assets are easily turned into cash, they are sometimes referred to as "liquid assets."
Cash and Cash Equivalents
Cash and cash equivalents under the current assets section of a balance sheet represent the amount of money the company has in the bank, whether in the form of cash, savings bonds, certificates of deposit, or money invested in money market funds. It tells you how much money is available to the business immediately.
What is the proper amount of cash a company should keep on its balance sheet?Generally speaking, the more cash on hand the better, although excessive amounts are likely to make investors unhappy, as they would rather have the money paid out in the form of a dividend to be reinvested, spent, saved, or given to charity.
Short-Term Investments
These are investments that a company plans to sell quickly or can be sold to provide cash.
Note
Short-term investments aren't as readily available as money in a checking account, but they provide added cushion if some immediate need were to arise.
Such securities and assets become important when a company has so much cash sitting around that it has no qualms about tying some of it up in slightly longer-term investment vehicles, such as bonds, that have maturities of less than one year. That allows the business to earn a higher interest rate than if it were to stick the cash in a corporate savings account.
Accounts Receivable
A company's accounts receivable is the outstanding money owed to it in the short term from customers or clients. It's counted under current assets, because it is money the company can rightfully collect, having loaned it to clients as credit, in one year or less.
Inventory
Inventory is another type of current asset; it refers to the goods or raw materials a company has on hand that it can sell or use to produce products for sale. Then those products are sold, producing revenue.
Cash-on-Hand and Dividends
A decent amount of cash on hand gives management the ability to pay dividends and repurchase shares, but more importantly, it can provide extra wiggle room if the company runs into any financial difficulties.
Typically, a common stock investor is going to be happiest when the stock market heads down if she owns a large, profitable business with enormous cash reserves and little to no debt. Such a strongly capitalized business can take advantage of a tough financial climate to buy up competitors for a fraction of their true value.
Examples of Cash-Heavy Companies
A company with ample capital under its current assets is said to have a "fortress balance sheet."One such example is Warren Buffet's holding company, Berkshire Hathaway, which had a stockpile of more than $138 billion in cash by the end of 2020.
Another example of a company with tons of cash is Japanese video game company Nintendo, which has so much cash parked in its current assets ($5 billion) that even if it stopped selling products tomorrow, it could continue to pay its bills for years.Perhaps Nintendo has fortified itself with cash, because memories of the 1980s crash of the video game industry are still fresh. During that time, video game companies lost hundreds of millions of dollars and laid off thousands of employees as demand dropped and sales plummeted.
Borrowing for Balance Sheet Cash
There are some cases where cash on the balance sheet isn't necessarily a good thing. When a company is not able to generate enough profits, it may borrow money from the bank, which means the money sitting on its balance sheet as cash is actually debt. To find out, you will have to look at the amount of debt the company has, which is shown in its balance sheet liabilities section.
Note
You probably won't be able to tell if a company is weak based on its cash balance alone.The amount of cash relative to debt payments, maturities, and cash flow needs is far more telling.
Not All Current Assets Are Equal
When analyzing a company balance sheet, understand that not all current assets on the balance sheet are equal. For example, a company might place money in instruments such as auction-rate securities, a sort of variable-rate bond, which they treat as safe cash alternatives. However, the market for those instruments could dry up, and it could take weeks or months—or even longer—to be able to convert them back into cash, making them unexpectedly illiquid.
As an investor, it pays to be wary of exposing your portfolio to a firm that has too many questionable securities under its current assets section, because it could indicate a failure of managerial competence or proper oversight.In the case of auction-rate securities, the failure rate was exceedingly high, and the use of auction-rate securities as a current asset significantly declined.
Frequently Asked Questions (FAQs)
What is the purpose of a company's balance sheet?
A balance sheet is a financial report that shows how a business is funded and structured. It can be used by investors to understand a company's financial health when they are deciding whether or not to invest. A balance sheet is filed with the Securities and Exchange Commission (SEC).
What is the current ratio?
The current ratio tells you how many times a company's assets could cover its debt. It's calculated by dividing current assets by current liabilities. It's a liquidity ratio, which means it gives you a snapshot of a company's liquidity.
Which current assets are included in the acid test ratio?
The "quick" or "acid-test" ratio is another liquidity ratio. It is more conservative than the current ratio. Rather than comparing all current assets to the current liabilities, the quick ratio only includes the most liquid of assets. These "quick" assets include cash and marketable securities. Assets like inventory are not included in the acid test ratio.
FAQs
Current Assets is an account listed on a balance sheet that shows the value of the assets owned by a company that can be converted to cash through liquidation, use, or sales within one year.
How do you explain current assets on a balance sheet? ›
Current Assets is an account listed on a balance sheet that shows the value of the assets owned by a company that can be converted to cash through liquidation, use, or sales within one year.
Which current assets should be shown in the balance sheet is? ›
Explanation: The common order where current assets that appear on the balance sheet are cash (petty cash, cash, and checking accounts), short-term investments, prepaid expenses, supplies, inventories, accounts receivables, and marketable securities.
What is a simple explanation of current assets? ›
Current assets (also called short-term assets) are assets a business uses, replaces and/or converts to cash within a normal operating cycle (typically less than 12 months). It distinguishes them from long-term assets, those a business uses for more than a year.
What is current assets answer in one sentence? ›
A current asset is an asset that a company holds and can be easily sold or consumed and further lead to the conversion of liquid cash. For a company, a current asset is an important factor as it gives them a space to use the money on a day-to-day basis and clear the current business expenses.
Which of the following would not be considered a current asset? ›
Land is regarded as a fixed asset or non-current asset in accounting and not a current asset.
What is the objective of current assets? ›
Current assets are used to facilitate day-to-day operational expenses and investments. As a result, short-term assets are liquid, meaning they can be readily converted into cash. Examples of current assets include: Cash and cash equivalents, which might consist of certificates of deposit.
What current assets does not cover? ›
Fixed assets, including the land, fixtures, vehicles, machinery, and vehicles, are not included in current assets.
What is the difference between assets and current assets? ›
An asset is any item or resource with a monetary value that a business owns. Current assets are those that you can convert into cash within one year, such as short-term investments and accounts receivable.
Is bills receivable a current asset? ›
Bills Receivable is a current asset.
The key features of the current asset are their short-lived existence, fast conversion into other assets, recurring and quick decisions, and, lastly, interlinked.
What are 3 types of current assets? ›
Here are the seven main types of current assets, listed in order of liquidity (which is how they should be listed on a balance sheet).
- Cash and cash equivalents. Cash is simple: It's how much money you have in the bank. ...
- Marketable securities. ...
- Accounts receivable. ...
- Inventory. ...
- Supplies. ...
- Prepaid expenses.
How to calculate current assets
- Current Assets = Cash + Cash Equivalents + Marketable Securities + Accounts Receivable + Inventory + Supplies + Prepaid Expenses + Other Liquid Assets.
- Current Ratio = Current Assets / Current Liabilities.
Yes, a car is regarded as a fixed asset or capital asset as it is useful for the business in the long term. But, one point to note is that the car is subject to depreciation. Also read: Intangible Assets.
Is furniture a current asset? ›
No, furniture is considered as a fixed asset in accounting as it provides value to the business in the long term.
Is building a current asset? ›
Is a Building a Current Asset? Buildings are not classified as current assets on the balance sheet. Buildings are long-term assets categorized under the fixed asset account. Just like land, buildings are long-term investments that a company typically holds onto for several years.
What is the importance of current assets in a company? ›
Why are current assets important? Current assets provide the funds a business uses to pay for daily operational expenditures and other short-term operating expenses. If a business cannot pay these expenses, it will be unable to operate and will soon go out of business.
How do you use current assets? ›
Another way current assets can be used on your balance sheet is for calculating liquidity ratios. By showing you the balance of assets to liabilities, liquidity ratios give you a sense of your company's financial health and help you understand whether it can meet its short-term financial obligations.
Why would current assets increase? ›
If a company's owners invest additional cash in the company, the cash will increase the company's current assets with no increase in current liabilities. Therefore working capital will increase.
Is rent income a current asset? ›
Rent is an expense which can either be treated as a current asset or current liability. When rent is paid in advance before it is due, then it is known as prepaid rent and is considered as a current asset.
As stock and inventory are used in daily business activities and are generally purchased with the intention of being sold or consumed within a current accounting period, they can be considered current assets.
Is office equipment a current asset? ›
Yes, office equipment is considered a fixed asset or a non current asset. It will be used by the business for an extended period and is therefore also considered as a long term asset. Also read: Intangible Assets.
How to identify current assets and current liabilities in balance sheet? ›
These liabilities are presented individually on the balance sheet's left side. Current assets include cash, debtors, bills receivable, short-term investments, and so on. Current liabilities include bank overdrafts, creditors, bills payable, and so on.
What is the difference between current assets and total assets? ›
No, current assets are not the same as total assets. A current asset is any asset that will provide an economic value for or within one year. Total assets accounts for all current assets, but also for long-term fixed assets, intangible assets, and other non-current assets.
Which should not be considered as current asset? ›
Examples of non-current assets include real estate, land, equipment, intangible assets, trademarks, copyrights, and patents. Non-current assets are also known as fixed assets. Since they're long-term investments, they can't be easily turned into cash within a year.
What is the correct order of the line items in the current assets? ›
Current Assets List
- Cash.
- Cash Equivalents.
- Stock or Inventory.
- Accounts Receivable.
- Marketable Securities.
- Prepaid Expenses.
- Other Liquid Assets.
Current assets = Cash and Cash Equivalents + Accounts Receivable + Inventory + Marketable Securities. Commercial Paper, Treasury notes, and other money market instruments are included in it.
Is higher current assets better? ›
If your current ratio is high, it means you have enough cash. The higher the ratio is, the more capable you are of paying off your debts. If your current ratio is low, it means you will have a difficult time paying your immediate debts and liabilities.
Do current assets have a debit or credit balance? ›
Assets and expenses have natural debit balances. This means that positive values for assets and expenses are debited and negative balances are credited.
