What Are Current Assets?

What Are Current Assets?

Let me explain current assets directly: they're the assets on your company's balance sheet that you can turn into cash within a year. Think of them as the quick-cash resources you own, like cash itself, money owed to you, or inventory you can sell fast.

You'll find current assets listed right at the top of the assets section on the balance sheet. They include cash and cash equivalents, accounts receivable, stock inventory, marketable securities, and even prepaid liabilities. Sometimes people just call them current accounts, but the point is they're all about short-term convertibility to cash.

How Current Assets Work

If you're running a publicly owned company, you have to follow GAAP and report everything transparently. Your balance sheet lists assets, liabilities, and equity, and current assets sit at the top of the assets side.

These are broken into sub-accounts that add up to the total. Take Apple, for example—in their 2023 fiscal year, they reported $143 billion in current assets, which gives them the liquidity to cover short-term debts if needed. Depending on your business, current assets could be anything from crude oil barrels to raw materials or foreign currency.

As an investor, you should pay attention to this section because it reveals how liquid the company is in the short term. If things go south, these assets can be sold off to pay bills.

Types of Current Assets

Across industries, businesses categorize current assets into common sub-accounts, though you might see variations. They're usually listed in order of how easily they convert to cash, but that can differ by company.

Cash and cash equivalents are the most straightforward—these are actual cash or things like CDs, money market funds, and short-term bonds that you can turn into cash quickly without restrictions.

Marketable securities are investments you can sell fast without losing value, like actively traded stocks or bonds. If they're not liquid, like low-volume shares, they don't count here.

Accounts receivable is money customers owe you for goods or services already delivered, as long as you expect payment within a year. If some won't pay, you subtract that as bad debt or through an allowance for doubtful accounts.

Inventory covers raw materials, work-in-progress, and finished goods ready for sale, but its liquidity depends on your industry—umbrellas might sell fast in rain season, but heavy machinery could sit unsold. Always check company reports to see if inventory levels are normal or a red flag, since it ties up capital.

Prepaid liabilities or expenses are payments you've made ahead for future goods or services, like insurance, freeing up cash for other uses even though you can't convert them directly to cash.

Other short-term investments might include excess funds in quick-access securities, keeping your money working while staying available.

Current Assets vs. Noncurrent Assets

Noncurrent assets are the opposite—they can't be cashed out within a year. You might see similar items in both categories, like a marketable security that's locked in long-term, making it noncurrent.

Things like property, plants, equipment, or buildings are classic noncurrent because selling them takes time, and they're valued at purchase price minus depreciation. Current assets, on the other hand, are at fair market value and don't depreciate.

Formula for Current Assets

Calculating current assets is straightforward: just add up all the sub-accounts that can become cash in a year. The formula is Current Assets = Cash + Cash Equivalents + Inventory + Accounts Receivable + Marketable Securities + Prepaid Expenses + Other Liquid Assets. Your balance sheet usually totals this for you, but you can verify by summing the details.

Real-World Example

Look at Walmart's 2024 fiscal year: they had $76.9 billion in current assets, broken down as $9.9 billion in cash and short-term investments, $9.0 billion in receivables, $54.9 billion in inventory, and $3.3 billion in other current assets.

Microsoft, in FY 2023, reported $184.3 billion, with $111.3 billion in cash and investments, $48.7 billion in receivables, $2.5 billion in inventory, and $21.8 billion in other assets. These numbers show how current assets scale with business size and type.

Financial Ratios That Use Current Assets

You can use current assets in ratios to gauge liquidity. The current ratio divides total current assets by current liabilities to see if you can cover short-term debts.

The quick ratio is stricter—it uses only cash, marketable securities, and receivables divided by liabilities, excluding inventory because it might not sell fast.

The cash ratio is the most conservative, just cash and equivalents over liabilities. These help assess debt-paying ability without selling fixed assets.

How Do Investors Use Current Assets?

As an investor, you look at current assets to understand a company's cash position for daily operations and debt payments. Management uses them to reallocate resources if needed. Creditors watch liquidity ratios based on current assets to check if the company can pay without borrowing more.

What Are Some Examples of Current Assets?

On the balance sheet, you'll see accounts like cash and equivalents (including money markets and CDs), marketable securities (stocks or bonds), accounts receivable (unpaid customer bills), inventory (goods for sale), and prepaid expenses (advance payments for future services).

What Are 3 Common Types of Current Assets?

Three that show up often are cash and cash equivalents for immediate liquidity, marketable securities for quick-sale investments, and prepaid expenses for already-paid future benefits.

The Bottom Line

In summary, current assets are what you can convert to cash in under a year, listed on the balance sheet to show liquidity. They vary by industry but typically include cash, securities, receivables, inventory, and other liquid items—crucial for understanding short-term financial health.