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What Are Current Assets? - Definition, Examples & Calculation

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Lesson Transcript
Instructor: Rebekiah Hill

Rebekiah has taught college accounting and has a master's in both management and business.

In this lesson, you will learn the meaning of the term current asset. You will also learn what items fall into the category of current assets and how they fit on a balance sheet.

Current Assets on the Balance Sheet

Financial statements are a company's window to the world. They tell the story of how successfully or unsuccessfully a company has performed for any given period. The three most common financial statements are the income statement, balance sheet, and statement of cash flows. Of the three statements, the balance sheet is the one that gives the clearest picture of the financial position of a company. The balance sheet is made up of three different sections: assets, liabilities, and stockholders equity. Each of these sections is further divided down into subsections.

For the purposes of this lesson, we will only be discussing the current assets subsection of the balance sheet.

Current Assets Defined

When you look at a balance sheet, you will see that the left hand side of this financial statement is the place where company assets are listed. An asset is a resource a company owns and expects to receive future benefit from. There are five main categories of assets:

  • Current assets
  • Long-term investments
  • Property, plant, and equipment
  • Intangible assets
  • Other assets

Current assets are cash and any other assets that a company plans to either turn into cash or consume within one year or in the operating cycle of the asset, whichever is longer. The operating cycle is the time between the purchases of raw materials needed to produce a product and the sale of the actual product. Current assets are presented on the balance sheet in the order that they can be liquidated, or turned into cash.

What is a Current Asset?

There are five major items that are usually found in the current assets section of a balance sheet.

Cash and cash equivalents - This is actual currency that's available for use. Cash equivalents are short-term investments that will mature, or become cash, within no more than three months.

Short-term investments - Although some short-term investments are categorized as cash equivalents because of their high liquidity ratios, the majority of short-term investments are grouped into three other categories.

  1. Held to maturity - These are debt securities, such as corporate bonds issued by the company, that are intended to be held to their maturity dates and not turned into immediate cash.
  2. Trading - These are both debt and equity securities, such as corporate bonds and stocks, that are purchased for the sole purpose of selling them in the near future to generate income.
  3. Available-for-sale - These are debt and equity securities that are held by the company, but not classified as either held-to-maturity or trading investments.

A company must report trading securities as current assets, but held-to-maturity and available-for-sale securities may be considered either current or noncurrent assets depending on the circumstances for which they were purchased.

Receivables are anything that a company is owed by a customer and has not been paid. An example of a receivable is a sale on an account to a customer.

Inventories are any raw materials, completed products, and products that are still works in process. When inventories are reported as current assets on a balance sheet, it is important to note the valuation method used for the inventory dollar amount. Some choose to use the first-in-first-out method of valuation, also known as FIFO. Others may use the last-in-first-out method, also known as LIFO.

Prepaid expenses are expenses that are paid in advance. An example of a prepaid expense is property insurance. Since property insurance is usually paid annually but is expensed out on the balance sheet at a monthly rate, then the balance in the prepaid account is still considered a current asset. To calculate the portion of prepaid expenses that will be left in the current asset section of the balance sheet, you make the following calculations:

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