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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 year).

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 current asset.

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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