Current assets are economic resources which the firm expects to sell, convert to cash, or consume within the greater of one year or the firm’s operating cycle.
Current assets include cash and equivalents, accounts receivable (also called trade receivables), notes receivable, inventory, and prepaid expenses.
Items on the balance sheet are presented in order of liquidity. Therefore, current assets are presented before long-term assets. The first account presented on the balance sheet is always cash and equivalents, as these assets are the most liquid.
Current assets are important to creditors since current assets are an important part of a company’s liquidity. Many common credit ratios utilize current assets.
For analytical purposes, although not for financial reporting purposes, current assets may be divided into operating current assets and financial current assets. Operating current assets are those current assets that correspond to the firm’s operating activities. Operating current assets include trade receivables, inventory, and prepaid expenses. Financial current assets are those current assets that are associated with the company’s immediate liquidity or that correspond to the firm’s investing activities. Financial current assets include cash and equivalents, short-term investments, and notes receivable.
Current assets are an important component of a firm’s working capital (also called net working capital). Working capital is broadly defined as current assets minus current liabilities. However, we can also calculate operating working capital. Operating working capital is defined as operating current assets minus operating current liabilities. Operating working capital is an important item in cash flow forecasts.
