A company’s assets include everything of value the company has, such as cash, investments, or property. Assets are put into two categories: current resources and long-term property. Current assets are useful when analyzing the financial health of a company because they can show the ability (or failure) to invest in its functions and pay expenses.
What are current resources? Current property are defined as all assets that may be expected to be converted to cash or equivalents within one year and are also called short-term resources. Short-term investments (marketable securities). Any liquid assets. It is critical to note that not all of these will actually be changed into cash within a yr.
For example, pre-paid expenses are outlined as a current asset because they eliminate the need to pay for things within the next year, saving cash thereby. Current assets are usually listed on the business’s balance sheet in descending order of liquidity. Cash is easy and simple kind of asset to use to invest in obligations, so it is listed first.
The order may differ with respect to the type of business, but generally the liquidity of assets is in the same order as the list written earlier. As an illustration, consider this snapshot of Wal-Mart’s balance sheet at the end of the last fiscal year. The current assets are obviously separated and listed in the order of liquidity.
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Cash is actually the most liquid asset, and receivables represent cash that the business has already gained but hasn’t yet received. Inventory is less liquid, as it signifies goods that may sell or might take time to convert to cash quickly. Finally, there are a few ratios we can calculate using current assets that can help us get a picture of the company’s ability to meet its short-term obligations.
First, the money percentage is the most traditional, as it only takes the company’s cash and equivalents into consideration, dividing those numbers by the existing liabilities. This shows what sort of company can immediately cover its short-term bills readily. Next, the quick ratio includes marketable securities and accounts receivable, but ignores inventory. Third, the current ratio includes all current liabilities in to the calculation. That is theoretically the best measure of a company’s capability to meet its commitments, but beware of inflated inventory amounts.