Current Assets & Liability 

Current Assets and Liabilities Current Asset Due within 1 Year, Current Liability Due within 1 Year The "current" section of the balance sheet is used to evaluate the "liquidity" of a company. From this section, we can determine if the company has enough current funds to meet its bills as well as any excess funds for other business purposes. An item is "current" if it comes due within one year. The current section of the balance sheet is highlighted:

Current assets consist of: 

Cash and Marketable Securities These are highly liquid - marketable securities can be turned into cash in 3 business days or less. Accounts Receivable These are invoices sent by the company against which payment is not yet received. It is normal for companies to have payment "terms" of 10 to 30 days on invoices. Therefore, if receivables are being well managed, they should not represent more than about 30 days' worth of sales. Accounts Receivable are considered highly liquid because they can be turned into cash quickly by selling them to a "factor." Factors extend credit to companies using receivables as collateral. Inventory These are inventories of goods that have not been sold. Inventories should not be too large relative to sales. Of the current assets, inventories are the least liquid, since they can be difficult to dispose of at full value.

Current Liabilities 

Current liabilities are all of the bills coming due within a year. Current liabilities consist of: Accounts Payable Amounts owed to trade creditors of the company. Wages Payable Monies owed to employees at the date of the balance sheet. These are wages that have accrued between payroll check dates. Taxes Payable Tax amounts owed to federal, state and city governments which have not been paid. Interest Payable Accrued amounts payable to note and bondholders between interest payment dates. We will now analyze the "liquidity position" of ABC Corporation. ABC has total current assets of $4,000,000 and total current liabilities of $2,000,000. It appears that ABC has plenty of funds to pay its bills coming due. ABC Corporation has "net working capital" of $2,000,000 - this is the excess of current assets over current liabilities. Thus, ABC has "excess" funds for use as it sees fit after all current bills are paid. 

The formula for Net Working Capital is:

Ratios that are used to measure liquidity include: Current Ratio

$4, 000 − $1, 000 / $2, 000 = 1.5 : 1

ABC Corporation has 1.5 times the assets "quickly convertible" to cash that it needs to pay off its bills. If this ratio is less than 1, the company may have problems meeting its current bills.

Also note that if a company has any other current assets that cannot be quickly converted to cash, they would be deducted as well. An example is Prepaid Expenses, such as prepaid rent or insurance. These payments are made in advance of use, are booked as an asset, and then are expensed as they are "used up." This is a current asset that almost never converts to cash.