What Are Current Assets? Plus How To Calculate Their Value
Updated 15 October 2022
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Companies own a variety of assets, which the company's leadership team might use to pay employees or invest in expansion. Assets contrast with liabilities, which are financial obligations the company might have to employees, vendors or investors. If you are a finance or business management professional, learning about different types of assets that a company might hold can deepen your understanding of financial management.
In this article, we define current assets, explain why they are important for businesses, describe where you might list them on a financial statement, list common types of these assets and share a method for calculating the total value of these assets.
What Are Current Assets?
Current assets are assets that a business can convert into cash by the end of the fiscal year. They have a high liquidity, which is a financial measurement of how easily a holder can transform the asset into money. You might convert these assets into cash by liquidating them, selling them or using them to create products for sale. An asset portfolio might combine this asset type with noncurrent assets, which may take longer to convert into cash.
Related: Assets Vs Income: Definition And Differences (With Types)
Why Are They Important?
Having this type of asset allows a company to fulfil their current liabilities, which may include production material costs, employee wages and government taxes. Investors might see this asset type as an indicator of the company's overall worth and its ability to expand. For example, a company that has a large amount of cash, cash equivalents and marketable securities might have the money to open a new franchise without issuing additional stock or taking a loan from a bank. This ability to spend money on expansion can show shareholders that the company is a wise investment.
This type of asset also protects the company from emergencies that might disrupt normal production or from economic downturns. For example, if a company has significant cash and other liquid assets, it might be able to survive a recession without cutting salaries or laying off employees. Many investment professionals recommend that companies have a diverse asset portfolio that includes a wide range of these assets, along with less liquid assets like land and intellectual property.
Related: Asset Management Tools (With Categories And Benefits)
Where Do You List Them?
On a financial report, these assets have their own category, separated from non-current assets like land or trademarks. Typically, you find the Current Assets section at the top of the balance sheet, followed by Noncurrent Assets. After the asset sections, you might find the company's Current Liabilities and Noncurrent Liabilities. Some types of assets, like securities, might exist in both the Current Assets and Noncurrent Assets section, since some of the company's securities might be more liquid than others.
This structure allows investors and managers to see the difference between the company's overall value and the value of the cash the company's leadership team can access quickly. For example, a university might have lots of land, which is a noncurrent asset that adds to the organisation's total monetary value but that does not provide funds to pay employees or build new facilities unless the organisation sells the land. If the university's assets are mostly noncurrent, it might take longer to launch expansion or improvement plans since it can take several years to complete a land sale to a buyer.
Related: Asset Vs Expense: Differences, Types And Best Practises
Examples Of These Assets
Here are some common examples of this asset type:
Cash is the most liquid asset because it has already been converted into a spending form. Companies might have cash savings in regular bank accounts or in high-interest savings accounts, which take a little longer to process withdrawals but offer higher interest rates on saved money. While many asset management strategies involve a variety of asset types, having significant cash reserves can keep a company operational during periods of low sales or temporary closures. The reserves can allow managers to continue paying employees and ensure the company is able to pay its bills.
Related: What Are Asset Classes? (With Definition And Types)
A company might have additional funds in cash equivalents, which are non-cash assets with specific monetary values. Examples include government bonds, certificates of deposit and commercial papers, which are short-term liabilities issued by large companies to cover expenses. Because these assets are so short term, they do not experience a lot of variability in their market value.
Related: What Is Asset Management? (With Career Options)
Companies that produce consumer goods might have a stock of inventory that is ready for sale when stores deplete their current stock. These companies might store the inventory in warehouses or fulfilment centres. During high productivity periods, employees might manufacture more goods than the company currently needs for sale. Depending on the type of product, inventory and logistics managers might store the excess products for future sale and develop a strategy for using these goods. To fit these assets into a current category, the company might sell them within one year.
Related: Inventory To Sales Ratio (Definition And Importance)
Accounts receivable are sums of money that customers owe to the company for products or services. Companies may have significant potential revenue in this category, especially if they offer internal payment plans for customers. For example, a tutoring company might offer parents the opportunity to pay for a prep class in three instalments. Parents who choose this option open accounts with the company and the money they owe goes into the accounts receivable category. Usually, this revenue converts to cash when the customer pays on time. In some cases, the company might employ a collections agency to collect balances.
Related: Management Of Receivables: Definition, Aspects And Benefits
Companies also pay vendors and other companies for a variety of products and services, like insurance and office supplies, that help the company operate. If a company's leadership team pays for these services in advance, the amount they pay gets added to this asset category. Some services, like insurance, only allow payment in advance. While you cannot convert these services directly to cash, they represent an amount that the company does not owe at a later date, freeing money for other expenses. Also, paying for services in advance sometimes allows the company to get a lower rate.
Marketable securities are securities that the company can sell on a public market for cash value quickly. Examples include exchange-traded funds and common stock, which follow market regulations and have easily determined cash values. Typically, these investments reach maturity within a few months, which means that the holder can sell them at any time after that and potentially make a profit. Private stock is not a marketable security, because while you can trade these shares to other buyers, they do not have a regulated cash value.
Companies might hold current assets that do not fit into any of the other categories. For example, they might extend a short-term loan to a partner organisation, with the expectation that the recipient pays the interest and balance within six months. Since that asset might become cash within a year, it fits into this category. For both accounts receivable and loaned money, the amount counts as an asset as long as the company expects to receive full payment.
Related: What Does A Securities Broker Do? (How To Become One)
How To Calculate Value
Balance sheets track the current estimated value of a company's assets, and finance professionals might compile these reports every week or month. To calculate the total value of the assets in this category, you can follow these steps:
1. Collect asset values in each type
The first step in calculating this value is to find out the value of each individual type of asset in this category. This may involve combining values from across different accounts. For example, if a company has a regular savings account and a high-interest account, you might combine the two accounts to measure the total cash in savings. Some of the values might be estimates based on past years, particularly for values like inventory. You might ask the inventory or logistics manager how much of the available inventory they predict might sell before the end of the year.
2. Add the values together
Once you have recorded the value of each asset type on the balance sheet, add the values together to get your total. Depending on the company, you might have values in some or all of the categories. For example, a company that sells products might have available inventory with an estimated sale value, while a company that provides services might not have any value in that category.
3. Record the result
After you have added the values together, record the result at the bottom of the Current Assets section of the balance sheet. The total asset value in this category, combined with the total noncurrent asset value, creates the company's total asset value. You can compare this value to the total liabilities and shareholder equity amounts to ensure that the combined value of assets and shareholder equity equals the total liabilities. If these values are the same, the company has balanced finances.
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