Current Assets: Definition and Examples
Current assets are short-term assets that a company expects to convert to cash, use in the course of business, or sell off within a one year time period.
What Are Current Assets?
Current assets are short-term assets that a company expects to convert to cash, use in the course of business, or sell off within a one year time period. They are sometimes called liquid assets. Liquidity refers to how easy something is to convert to cash without affecting its value.
Current assets and liquidity are important financial measures for a business because they allow a company to pay off its current debt obligations. Financial ratios often use current assets to determine how easily a company is able to pay its debts as they come due. These ratios include the Current ratio and the Quick ratio (also know as the acid test ratio).
Where Do Current Assets Appear on the Financial Statements?
The balance sheet shows a company’s assets, liabilities, and equity at a certain point in time. It is a snapshot of a company’s financial position as of the date of the financial statements. Because current assets are the most liquid type of asset, they are the first asset category listed on a company’s balance sheet. Current assets will usually have a subtotal on the balance sheet as well, for easy identification.
Examples of Current Assets
Current assets include:
- Cash & Cash equivalents
- Short-term investments
- Accounts receivable
- Inventory
- Supplies
- Prepaid expenses
Cash & Cash Equivalents
Cash is the easiest current asset to identify. It is the sum of all cash accounts that appear on a company’s general ledger. It includes money that is present in a company’s bank account or petty cash drawer as of the date of the financial statements. The general ledger cash balance should be reconciled to the company’s bank statement on a monthly basis, at a minimum.
Cash equivalents include items that can be converted into cash in the very near term. Cash equivalents include the following items, if they had a maturity date of three months or less at the time the company purchased it:
- Certificate of deposit
- U.S. Treasury bills
Marketable Securities
Marketable securities are a subcategory of cash equivalents. They include financial instruments that have an identifiable value, are actively traded, and can easily be converted into cash via a sale. They include both debt and equity securities. Debt securities offer interest payments in exchange for money that is loaned to the company. Equity securities are investments in the company by an outside party who receives a partial ownership in the company. Examples of marketable securities include:
- Bonds
- Common stock
Accounts Receivable
Accounts receivable result from the sale of goods or services on credit. When a customer purchases a good or service and agrees to pay for it at a later date, the amount is added to the accounts receivable account in a company’s general ledger. Because some customers are unlikely to pay their bills in full, accounts receivable must be discounted to allow for doubtful or uncollectible accounts. The discounted amount is considered to be a current asset because it is the total amount that is likely to be converted to cash in the near term.
Inventory
Inventory is an asset because it is a source of potential revenue. Inventory is considered to be a current asset because the company usually expects to sell the product within the year. However, inventory is not as liquid as other current assets.
Supplies
Supplies may be recorded as expenses immediately if the value is insignificant. If the value is not insignificant, it may appear as a current asset. Supplies are current assets because they are used up within a year. If an item has a significant value and is expected to be used over the course of more than a year, it is better classified as a fixed asset. Supplies are not as liquid as other current assets.
Prepaid Expenses
Prepaid expenses are payments made in advance for a future service that has not yet been provided. Prepaid expenses are recorded as a current asset because the value of the prepaid expense should be realized over the near term. When a company receives the benefit of the prepaid expense, it is expensed. Prepaid expenses are not as liquid as other current assets.
Current Assets Formula
The formula for calculating current assets is the addition of all line items under current assets.
Current Assets = Cash + Cash Equivalents + Short-term Investments + Accounts Receivable + Inventory + Supplies + Prepaid Expenses
While this is the standard formula, depending on the company’s industry, the line items may vary slightly. For example, a service-based industry like management consulting will not have any inventory as they don’t offer any products. By calculating the current assets, we can calculate important liquidity ratios such as the current ratio which we’ll look at later.
Current Assets vs. Noncurrent Assets
Noncurrent assets– or long-term assets– are not easily converted into cash. They are not expected to be converted to cash, used up, or sold within a one year time period. Noncurrent assets are used by a company over the course of multiple years to generate revenue for the business. Noncurrent assets include items such as:
- Fixed assets– also known as property, plant, and equipment
- Intellectual property– such as goodwill, patents, copyrights, and trademarks
- Long-term investments
Common Ratios Using Current Assets
Liquidity ratios commonly use current assets– or a specific subset of current assets– to calculate a company’s ability to pay its debt obligations as they come due. Liquidity ratios include:
- Current Ratio
- Quick Ratio or Acid Test Ratio
Current Ratio
The current ratio is a basic liquidity ratio that is used to determine a company’s ability to pay its current liabilities with its current assets. A good current ratio is considered to be between 1.5 and 3.0, depending on the industry. The current ratio formula is:
Current Ratio = Current Assets / Current Liabilities
Quick Ratio or Acid Test Ratio
The quick ratio– also known as the acid test ratio– is a more conservative liquidity ratio that only uses a company’s most liquid current assets to determine a company’s ability to pay its current liabilities. A good quick ratio is considered to be above 1.0. The quick ratio formula is:
Quick Ratio = Liquid Assets / Current Liabilities
Where:
- Liquid Assets = Current Assets - Inventory - Supplies - Prepaid Expenses
Real Company Example: Macy’s January 2023 Current Assets
In Macy’s 2022 Annual Report, its current assets as of January 28, 2023 are listed at the top of its consolidated balance sheet. The current assets included on Macy’s balance sheet are:
- Cash and cash equivalents - $862 million in 2023 and $1.712 billion in 2022
- Receivables - $300 million in 2023 and $297 million in 2022
- Merchandise inventories - $4.267 billion in 2023 and $4.383 billion in 2022
- Prepaid expenses and other current assets - $424 million in 2023 and $366 million in 2022
.webp)
Macy’s lists its total current assets as $5.853 billion in 2023 and $6.758 billion in 2022 and its total current liabilities as $4.861 billion in 2023 and $5.416 billion in 2022.
Here are the calculations for Macy’s current ratio and quick ratio in 2023 and 2022:
Current Ratio in 2023 = $5.853 billion / $4.861 billion = 1.20
Where:
- $5.853 billion = Current Assets
- $4.861 billion = Current Liabilities
Current Ratio in 2022 = $6.758 billion / $5.416 billion = 1.25
Where:
- $6.758 billion = Current Assets
- $5.416 billion = Current Liabilities
Quick Ratio in 2023 = ($5.853 billion - $4.267 billion - $424 million) / $4.861 billion = 0.24
Where:
- $5.853 billion = Current Assets
- $4.267 billion = Merchandise Inventories
- $424 million = Prepaid Expenses and Other Current Assets
- $4.861 billion = Current Liabilities
Quick Ratio in 2022 = ($6.758 billion - $4.383 billion - $366 million) / $5.416 billion = 0.37
- $6.758 billion = Current Assets
- $4.383 billion = Merchandise Inventories
- $366 million = Prepaid Expenses and Other Current Assets
- $5.416 billion = Current Liabilities
These numbers are vastly different because Macy’s is a major retailer with most of its current assets tied up in merchandise inventory. Inventory is not considered to be as liquid an asset as other current assets because, in order to sell inventory in a hurry, it may have to be heavily discounted. This devalues the inventory amount that can be realized from a sale from the book value on the general ledger.
Merchandise payable is also separately identified under the current liabilities section of Macy’s balance sheet– $2.053 billion in 2023 and $2.222 billion in 2022. If Macy’s has an agreement with its suppliers that these amounts do not have to be paid until the sale of the merchandise, the quick ratio is not as accurate as it could be in determining Macy’s ability to repay its debts. However, it still does not meet the gold standard 1.0 quick ratio or 1.5 current ratio.
Additional Resources
Want to level up your accounting? Consider checking out our Financial Accounting Essentials where we teach students how to build a balance sheet, income statement, and cash flow statement from scratch based on a set of transactions. You'll also learn to find, read, and analyze the financial statements of real companies such as Microsoft and PepsiCo. Students who have taken this course have gone on to work at Barclays, Bloomberg, Goldman Sachs, EY, and many other prestigious companies. Get started now!
Other Articles You May Find Helpful
Ready to Level Up Your Career?
Learn the practical skills used at Fortune 500 companies across the globe.