Current Assets and Their Importance for Companies
Current assets are important for the day-to-day operations of the business. That’s why they are so valuable.
A Deeper Insight into Current Assets
Assets are important for a company since they provide it with the resources needed to invest in their business and to pay off debts. Investopedia explains that current-assets refer to a company’s assets that can be consumed, used or sold through the usual business operations. This results in these assets being converted to cash value through the next year. One year is the time horizon of the current assets, from the date in the company balance sheet’s heading. Examples of current assets are liquid assets such as cash and cash equivalents, stock inventory, accounts receivable, prepaid liabilities, marketable securities, etc. Current assets are also sometimes known as current accounts in certain jurisdictions.
Current assets are in contrast to long-term assets that cannot be converted to cash in just a year. These illiquid assets are components such as equipment, facilities, copyrights, land, etc.
Importance of Current Assets
Current assets are essential for businesses since these are what fund their daily business operations. They’re what run the business. Without them the company usually hits a standstill. Current assets are depicted as all the resources’ and assets’ dollar value that is easily converted to cash in a short time period. They depict the liquid assets of a company.
Components of Current Assets
But current assets should only include qualifying assets that can be converted to cash at the fair price through the next year. FMCG goods that a company produces have a great likelihood of being sold through the next year. Inventory is therefore included in the company’s current assets. Heavy machinery, land and other such illiquid assets can’t be converted to cash easily, and they don’t come under the company’s primary business. They can’t be converted to cash over the next year and are therefore excluded and don’t make up current assets. What does and does not make up current assets also depend on the nature of a particular business. What the company produces and markets influences what can and can’t be included among its current assets.
As a result, current assets vary among businesses. They could include fabricated goods, crude oil barrels, inventory of work or goods production in progress, or even foreign currency and raw materials.
Current Assets on the Balance Sheet
Current-assets are usually depicted in their order of liquidity on the balance sheet. Assets that have a greater convenience and probability of conversion to cash get ranked higher. The order in which current assets appear is usually as follows:
- Short-term investments
- Accounts receivable
- Prepaid expenses
- Other liquid assets
The formula for calculating current assets is adding up all the above-mentioned components.
As we mentioned before, current assets are very important for a business since these assets contribute to the daily running of the business. The company management attaches great importance to these current assets that represent a dollar value. This value offers insight into the liquidity position of a company. The management can be accordingly prepared to make any necessary arrangements for continuing business operations.
With stock market trading software, you have a lot of features to help you trade effectively. The health of companies determines the health of the representative stocks. So it is important that you monitor all aspects of the selected company’s health.
This content is restricted to site members. If you are an existing user, please log in. New users may register below for FREE.