- Demonstrate how current assets are reported on the balance sheet
We have already identified assets as a resource with economic value that a company owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company’s balance sheet and are bought or created to increase a firm’s value or benefit the firm’s operations. One of the characteristics of assets is that they can be classified as long-term (held for over one year) or current (held for less than one year).
Current assets include cash and cash equivalents, accounts receivable, and inventory. Cash includes bank account balances, petty cash, and cash equivalents. Cash equivalents are very safe assets that can be readily converted into cash, such as U.S. Treasury Notes and marketable securities such as stocks and bonds. As you learned in the previous section, another major category of current assets is inventory.
Another class of current assets is Accounts Receivable. Companies often sell products or services to customers on credit; these obligations, result in an amount owed to the company or a receivable which are also classified as current assets.
Current assets are the most liquid assets and are listed first on the balance sheet. This is because they will or may turn into cash within a short period of time. For instance, accounts receivable are usually collected within 30 days. In any case, in order for an asset to be classified as current, it must have a life span of less than one year.
It should be noted that not all current assets convert to cash. For instance, prepaid expenses that will expire within the one-year window are listed as current assets. This type of current asset includes things like the annual premium paid for insurance and rent paid in advance. The excerpt from a balance sheet shown below illustrates how current assets are presented:
|Cash and Cash Equivalents
|Short Term Investments
|Other Current Assets