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Current Assets

Financial Statements

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Current assets can be converted to cash in less than one year. This section of assets is used to pay off debts that also are coming due within one year. Current assets are direly important to a company’s short term since they can quickly be turned into cash to allow a company to move through a rough business period. They are listed in the order of the most liquid to least, based on how difficult it is to convert them to cash. It may be labeled Quick, Liquid, Floating, or Working assets. You should ensure companies you are investing in have current assets which exceed current liabilities.

Cash and Cash Equivalents

Cash and Cash Equivalents consist of the actual cash the business has for its operations at the time of the balance sheet’s creation. It also consists of assets that will become cash very quickly. Short-term certificates of deposits or extremely short-term treasuries may be included in this section due to their conversion to cash within the next year. A high cash or cash equivalents mean the company is good at cash generation, sold equity or bonds to investors and creditors, or recently sold a part of their business. You should favor companies that have large cash surpluses. They should especially be preferred if they didn’t have to sell equity, bonds, or business sectors to acquire the surplus.

Accounts Receivable

Accounts Receivable measures the amount of money owed to the business for products and services sold on credit. These are usually paid within a period of 30 to 120 days, but requirements change company to company. You should always check proxy statement notes to ensure of the time period. Many times, customers fail to pay on time or fail to pay at all, and this reality is represented in the allowance for bad debts. The actual receivables after subtracting the allowance for bad debts are the “Net Receivables”. If the allowance for bad debts has not been subtracted, it is referred to as the “Gross Receivables”. Since reception of receivables is not reliable, seek companies that have lower amounts than competitors. There is no guarantee a company will ever be paid the precise amount it’s owed. You should not rely on accounts receivable as an investor.

Inventory

Inventory consists of products that have yet to be sold for cash or on credit for accounts receivable. The value of inventory is the amount held specifically at the time of the balance sheet’s creation. Inventory should be looked at with caution depending on the industry. Certain industries have products that are extremely durable and can be sold over the long term without substantial value loss. Other industries, such as electronics, high-end clothing, or food, contains product that rapidly either spoils or becomes undesirable, and loses value if not sold quickly. You should look for companies that have a steady increase in earnings, with inventory increasing behind it, indicating strong and growing sales.

Prepaid Expenses

Prepaid expenses are future expenses that have been paid for in advance of their delivery. These services or products are owed to the business and are counted as assets. Once they have been completed in full, they will be canceled out as an asset.

Other Current Assets

Other Current Assets represent all debts owed to the company within the current year that does not apply to other categories. A tax return which has not been paid is a fairly common example.

Total Current Assets

Total Current Assets are the total value of all assets due within the year. This should be directly compared to current liabilities since these assets will pay those debts in the short run. If current liabilities greatly outweigh current assets the company may have to borrow, seek investment, or use previous earnings to cover the difference. As a reminder, you should be weary of companies which have fewer current assets than liabilities, especially if it’s a trend.

 

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