Current assets are a key metric on a company’s balance sheet. They represent the value of assets that can reasonably be converted into cash within one year. Calculating current assets helps gauge a company’s liquidity and ability to meet its short-term obligations.
For small business owners and accounting professionals, understanding how to determine total current assets is crucial. Let’s walk through the formula and steps to calculate this essential financial indicator.
What Are Current Assets?
Current assets are balances owed to a company that it expects to receive or convert into cash within one year or less. Common examples include:
- Cash – Currency and money in bank accounts
- Accounts receivable – Money owed by customers
- Inventory – Goods manufactured or purchased for resale
- Prepaid expenses – Expenses paid for in advance like insurance, rent, etc.
These liquid assets provide working capital to run day-to-day operations and pay near-term expenses. They are listed in order of liquidity on the balance sheet, from cash (most liquid) to prepaid expenses (least liquid).
Non-current assets like property, plants, and equipment are longer-term assets excluded from this calculation.
Why Current Assets Matter
The level of current assets impacts a company’s financial health in key ways
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Liquidity – Current assets’ nearness to cash indicates how easily a company can pay debts and expenses coming due within the year Higher current assets offer more liquidity,
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Working capital – Current assets minus current liabilities gives working capital, which fuels daily business functions. More working capital provides a buffer for unexpected costs.
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Financial ratios – Current assets factor into liquidity and efficiency ratios like the current and quick ratios. These ratios evaluate how well a business manages assets and liabilities.
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Growth prospects – Increasing current assets often signals business expansion and sales growth as inventory accounts receivable, and cash reserves rise.
The Formula for Current Assets
Current assets are calculated by summing the balances of all current asset accounts. The formula is:
Current Assets = Cash + Accounts Receivable + Inventory + Prepaid Expenses
Let’s look at what comprises each element:
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Cash – This includes physical currency and money in checking or savings accounts that is available for spending. Petty cash funds fall under this category.
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Accounts receivable – Also called receivables or A/R, these are amounts customers owe for goods or services delivered on credit. They are assets because they represent future cash inflows once customers pay.
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Inventory – This includes raw materials, work-in-process goods, and finished products intended for sale. Inventory balances reflect what the company has invested in manufacturing or purchasing goods for resale.
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Prepaid expenses – These represent operating expenses paid in advance before the period they will be used or consumed. Examples include prepaid rent, insurance, subscriptions, etc.
Next, we’ll go through the steps to calculate current assets and look at an example.
How to Calculate Current Assets Step-by-Step
Follow these steps to determine a company’s total current assets:
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Obtain the company’s balance sheet for the time period you want to analyze. Public companies publish balance sheets quarterly and annually. Private companies may use monthly or annual balance sheets.
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Identify each current asset account balance on the balance sheet for that period. This typically includes cash, accounts receivable, inventory, and prepaid expenses. But there may be additional short-term asset accounts.
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Add up the balances of each current asset account. This can be done manually or using Excel:
- Manually total the balances with a calculator.
- Use Excel’s SUM function to automatically calculate the total.
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The sum equals total current assets for that reporting period. Compare it to previous periods to spot trends over time.
- Calculate current assets as a percentage of total assets. Divide current assets by total assets to assess what portion of assets are highly liquid.
Let’s look at an example calculation based on a sample balance sheet:
Sample Balance Sheet
| Assets | |
|---|---|
| Cash | $5,000 |
| Accounts Receivable | $8,000 |
| Inventory | $25,000 |
| Prepaid Expenses | $3,000 |
| Total Current Assets | ? |
| Property, Plant & Equipment | $200,000 |
| Total Assets | $241,000 |
Total Current Assets = Cash + Accounts Receivable + Inventory + Prepaid Expenses
- = $5,000 + $8,000 + $25,000 + $3,000
- = $41,000
So based on the balances on this sample balance sheet, the company’s total current assets for the period equal $41,000.
Current assets of $41,000 / Total assets of $241,000 equals 17%. So current assets are 17% of total assets for this company.
Improving Current Asset Management
Some tips for managing current assets efficiently include:
- Review accounts receivable aging and collections to ensure customers pay on time
- Optimize inventory management to limit excess stock
- Only prepay expenses when you get better terms or rates
- Shift excess cash into interest-bearing accounts when possible
- Assess if assets have become obsolete or impaired
Monitoring current assets helps maximize working capital available to operate smoothly. It also bolsters liquidity to handle unexpected costs and new opportunities.
Takeaways on Calculating Current Assets
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Current assets are short-term resources like cash, inventory, accounts receivable, and prepaid expenses that can be converted into cash within a year or less.
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The current assets formula sums cash, accounts receivable, inventory, and prepaid expenses balances on the balance sheet.
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Higher current asset levels improve liquidity and provide more working capital to run daily operations.
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Assessing current assets as a percentage of total assets shows the portion of assets with a short-term, liquid timeframe.
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Managing current assets wisely maximizes liquidity and optimizes the capital available for business activities.
Understanding how to determine total current assets is vital for tracking the financial health and agility of a business. This metric provides quick insight into liquidity, working capital, and the ability to cover short-term obligations.
What Happens If the Current Ratio Is Less Than 1?
As a general rule, a current ratio below 1.00 could indicate that a company might struggle to meet its short-term obligations, whereas ratios of above 1.00 might indicate a company is able to pay its current debts as they come due. If a companys current ratio is less than one, it may have more bills to pay than easily accessible resources to pay those bills.
Current Ratio vs. Other Liquidity Ratios
Other similar liquidity ratios can supplement a current ratio analysis. In each case, the differences in these measures can help an investor understand the current status of the company’s assets and liabilities from different angles, as well as how those accounts are changing over time.
The commonly used acid-test ratio, or quick ratio, compares a company’s easily liquidated assets (including cash, accounts receivable, and short-term investments, excluding inventory and prepaid expenses) to its current liabilities. The cash asset ratio, or cash ratio, also is similar to the current ratio, but it only compares a company’s marketable securities and cash to its current liabilities.
Companies may use days sales outstanding to better understand how long it takes for a company to collect payments after credit sales have been made. While the current ratio looks at the liquidity of the company overall, the days sales outstanding metric calculates liquidity specifically to how well a company collects outstanding accounts receivables.
Finally, the operating cash flow ratio compares a company’s active cash flow from operating activities (CFO) to its current liabilities. This allows a company to better gauge funding capabilities by omitting implications created by accounting entries.
The current ratio is most useful when measured over time, compared against a competitor, or compared against a benchmark.
Current vs Non Current Assets – Explained Simply!
How do you calculate current assets?
The formula for current assets is calculated by adding all the assets from the balance sheet that can be transformed into cash within a period of one year or less.
What are examples of current assets?
Examples of such current assets are short-term investments and prepaid expenses. The application of the total current assets formula shows the liquidity status of the company to stakeholders and shareholders, if applicable.
What is a current asset?
Current Assets is an account listed on a balance sheet that shows the value of the assets owned by a company that can be converted to cash through liquidation, use, or sales within one year. Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets.
What is a total current assets formula?
The application of the total current assets formula shows the liquidity status of the company to stakeholders and shareholders, if applicable. It also shows if the company is equipped enough to meet their short-term financial obligations and if the company has efficient cashflow management.
