Current assets are assets which are most liquid in the organization the assets which can be used up or be sold in the business cycle. Current assets are those assets which cannot be held in the organization for more than one year and they form the basis of working capital of the business. Current assets in the organization include stock, debtors, cash, short term investment, marketable security, accounts and notes receivable. Most of these assets are risk free assets with maturity periods of less than one year while others are of less than 90 days. Most firms must operate with some amount of current assets that contribute to the long term success of the company. How much current assets depends largely on the industry in which the firm is operating in. Firms with very predictable cash flows such as electric utilities can operate with fewer current assets while others must maintain positive levels of current assets.
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To define them, cash means cash at hand which is readily available to be used. While the marketable securities means those assets that takes the shortest time possible to convert them into cash. These current assets are made when there is excess fund that can be invested in short term while waiting for something to invest in. accounts receivables consists
Most stakeholders’ use of Current assets to measure a firm’s liquidity through how they cover its short term obligations current liabilities the more able it will be to pay its bills as they come due. However, a problem arises because each current asset and current liability has a different degree of liquidity associated with it. Although the firms current assets may not be converted into cash at precisely the point in time when it is needed the greater the amount of current assets present the more likely it is that some current asset will be converted into cash in order to pay a debt that is due.
There is an effect of the firm s level of current assets on its profitability risk trade –off. If the firm’s current assets to total assets increase, both the firm’s profitability and its risk decrease. Its profitability decreases become current assets are less profitable than fixed assets. The risk of technical insolvency decrease because, assuming that the firms current liabilities do not change, the increase in current assets will increase in current assets its net working capital.
Non current assets are usually classified into tangible and intangible assets. These assets are normally acquired using long term capital. They form the basis of long term sustainability of the organization. These assets consist of premises, land and building, furniture and equipment motor vehicles, goodwill and many others. These assets cannot be added up in the organization they form part of long term solvency of the organization. The classification of the short term and long term will depend on industry to industry. Motor vehicle manufacturing industry will classify motor vehicle in stock. Fixed assets provide benefits to the firm for a period more than one year and they are not for sale like some current assets and can not be exhausted in a single year. If the organization is through with an asset classified as an asset then it disposal of in a special way unlike stock which is sold in the course of business.
Non-current assets are recorded in the fixed assets book when disposed off, the profit or loss that arises from it is treated as an extra ordinary item in the income statement while it is removed as an asset the fixed asset schedule. The portion of fixed assets are expensed every year at specifies rate by what is called depreciation or amortization. These assets can be sub divided into tangible and intangibles assets.
Property, plant and equipment represent those fixed assets that are long term in the company they can be in the company more than fours. Intangible assets represents those assets that are not physical they include goodwill, research and development and incorporation expenses for new companies. So long the business is a going concern all fixed assets are relevant. However if the company is under liquidation intangible assets becomes valueless as they can not be sold in the market since assets will be sold individually.
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Current assets and non currents assets differ in many ways. To begin with current assets are short term assets are they always not more than year. While fixed assets are long term assets with a period of more than one year. Fixed are always amortized or depreciated as opposed to currents which are not depreciated. Fixed assets are not used up as current assets within one year. They also differs in recording, most of the current assets are recorded in realizable value that after allowing for obsolete and bad debts. The most interesting difference among the two is that most fraud cases centers always on the current assets. Some fixed assets may from time to time be valued when appreciated value.
The order in which they are reported in the balance is as follows Cash, marketable securities, receivables, inventories, raw materials work in progress finished goods, and notes receivable prepaid expenses deferred income tax. The balance sheet begins with the most liquidity to the less liquidity assets. However it should be noted that banks have cash assets which makes them have a different format of reporting in the balance sheet. This is the sample on how it is reported
It can be noted that when recording current assets most liquid is recorded first while in the fixed assets starts with the ones that takes the longest time to depreciate fully. The order of liquidity applies when preparing balance sheets and it depends which standards that are applicable. International reporting financial standards the order will be in least liquid assets first to the most liquid while generally accepted accounting standards they start with the most liquid assets.
Short term liquidity position of any company is analyzed using current assets. It shows that company improves its performance in terms of converting its inventory into sales. We can also use the current assets see whether a company is converting its inventory into receivables and receivable into cash quite efficiently. Therefore current and non current assets must be taken care of well to ensure they are treated so in the books. This will ensure non current assets are not used as current.
- Davis, H.Z,. and Y.C Peles (1993); Measuring equilibrating forces of financial ratios , the accounting review.
- Williams, Haka and Bettner ;( 2005) EBOOK COLLECTION: Financial & Managerial Accounting: The Basis for Business Decisions.
- Preparing A Balance Sheet.
- The balance sheet.