Current assets, on an accounting balance sheet, represent the total value of all assets that can readily be converted to cash. There are five main kinds of current assets: cash, short-term investments, accounts receivable, inventory, and prepaid expenses. Typically, these can all be easily converted into cash.
Cash or cash equivalents are the most liquid current assets. Money that can be withdrawn from a regular bank account or money market account qualifies as cash. Assets that can be quickly converted into cash, such as treasury bills and some short-term municipal bonds, are cash equivalents. Two general criteria for determining if a current asset is a cash equivalent is if it matures in less than three months and if it can be converted quickly.
Short-term investments that mature in over three months but under a year are also considered a current asset. If a company has more money on hand than it needs for the near future, it may invest some of its cash in a short-term bond. These funds can be liquidated, but it takes more effort than withdrawing cash. The company’s money is working for it and increasing the overall revenue.
Accounts receivable are one step further removed from cash in terms of liquidity. Once a company delivers its product or service, the customer owes the company money. Until that amount is paid, it is considered a receivable. Not all customers will pay for the service or product they receive; of those customers that do pay, not all of them will do so in a timely fashion. If a company’s accounts receivables are growing faster than its revenues, it hasn't been paid for many of its goods or services.
Inventory is also viewed as a current asset. Any items or services that have already been completed, but not yet sold, are considered inventory. Companies that sell physical goods usually carry an inventory. Less liquid than the first three current assets, inventory ties up cash — items need to be sold in order to add cash to the company revenue. Companies that provide services do not carry inventories.
A prepaid expense is considered a current asset because it reduces the amount of future expense. Generally, a company can pay in advance for advertising services. It may also choose to purchase more supplies than currently needed. These are examples of prepaid expenses. Although these are not really liquid assets, they do reduce future expenses — less expense in the future can equal a better revenue bottom line.
