What is Current Assets?

Meaning of Current Assets

The term current assets represents a company’s assets that can be easily sold, consumed, used, and depleted through business operations .

Current assets appear right at the top of the Balance Sheet and represent highly liquid securities , meaning they are easily converted to cash. Includes: the money itself and its equivalents, bank account, accounts receivable, stocks, financial investments, etc.

Represents the set of assets and rights convertible into cash in the short term. Current assets are also known as AC and at the end of the following year they will be part of the net working capital formation : CCL.

Non – current assets contrast with the other assets due to the fact that it is not as easy for them to be convertible to cash as AC.

What is a Non-Current Asset?

The big difference between current and non-current assets is their immediate liquidity and the fact that the second has a longer permanence in the entity and is intended for its operation.

Non -current assets can also be called permanent assets. Consists in:

  • Investments
  • Immobilized
  • Intangible
  • achievable in the long term

Elements of Current Assets

The AC consists of several accounting accounts , among which we have:

  • Raw material;
  • Stocks;
  • Unfinished products;
  • Accounts receivable within 1 year;
  • Bank deposits;
  • Cash reserve;
  • Short-term financial investments.

Current assets are important to the business because they can use the available funds in daily operations and also to pay routine expenses.

However, care must be taken when qualifying assets that can be liquidated in less than 1 year.

Current Asset Formula

The formula that the AC must follow is as follows:

Current assets = cash + cash equivalents + inventory + accounts receivable + marketable securities + prepaid expenses + other net assets.

All of these values ​​often appear on the company’s balance sheet.

What is Current Assets used for?

It is used for the daily operations of companies that need to have cash on hand quickly to meet their obligations.

In addition, creditors and investors pay more attention to current assets and their value , due to the possibility that an examined company may be at risk of being insolvent.

Why is Current Assets Important?

It is important for both the company and investors as it indicates how much money can be used in an emergency. Indicates how many funds are ready for immediate use.

Do you know why investors watch AC? Simply because if company X owes $1,000, but in the short term, its net working capital (sum of current assets and subtraction of current liabilities) is less than that, it means that this company will not have the money to pay its obligations.

By making a simple comparison, companies whose AC exceeds current obligations, at least, have a strong chance of solvency , of being able to pay off their debts in the short term.

And this is very necessary when we do a fundamental analysis of a company. For this reason, knowing these details helps when investing in stocks , for example.

Investors tend to look at this among other things, because if a company is in financial difficulty right away, it means it won’t be sustainable for long.

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