Sunday, May, 2, 2010
Resources that a company may readily access, either because they are on
hand as cash or because a company can reasonably expect to convert them
to cash by sale or consumption within one business cycle (up to one
Successful companies tend to run their businesses from current
assets. Companies that don't have sufficient current assets to run
their business have to do things like issue debt or shares of stock,
which, of course, dilutes that value of the company to existing
shareholders. Think of current assets in terms of your own budgeting.
An individual's current assets are things like salary, savings and
liquid investments. If these don't cover expenses, you turn to the
plastic or other kind of loan. Of course, like people, who generally
don't buy houses with current assets, businesses don't build factories
with current assets. But a business will attempt to make due in its
day-to-day operations from current assets. You can find GAAP on assets
in the FASB Codification, ASC Topic 305.
Generally speaking, there are five categories of current assets:
- Cash & Cash Equivalents: Cash is cash, and equivalents are
those instruments, like CDs and T-Bills, with short maturities (90 days
or less). Companies that have lots of cash and equivalents are also
those that have the ability to pay dividends.
- Marketable (Short-Term) Securities: Companies that have more
money than they need to run their businesses like to invest the money
in debt and equity markets. When the investment is in issues with
maturities of less than one year, or is one that the company intends to
dispose of within one year, the security is considered short-term and
is reported at fair market value.
- Accounts and Notes Receivable: These are the debts (payable
within one year) customers owe to the company for goods already
delivered. Companies report these at "net realizable value," which is
the amount a company actually expects to receive and excludes amounts
the company does not expect to receive. The latter amount is reported
as an allowance for bad debt. Sometimes when companies don't allow for
enough bad debts, they later have to take a write-down of unrecoverable
receivables to balance the books out.
- Inventory: These are goods a company has in production or
holds for sale, or goods that the company will convert in the process
of producing goods for sale. Inventory is the repository of
manufacturing companies. Most service-based companies tend to have
little, if any, inventory.
- Prepaid Expenses: When a company pays bills in advance, the
amount is considered a current asset, even though it means the company
has less cash and even though it is not particularly convertible into
cash. Nonetheless, in terms of a balance sheet, which covers several
months, money paid now doesn't have to be paid next month, so it is a
No doubt you noticed that the phrase "within one year" is very common
in a discussion of current assets. That should give you a pretty good
idea of what non-current assets include.
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