Current assets include:
- Cash and cash equivalents
- Short-term investments
- Accounts receivable
- Merchandise inventory
- Prepaid assets
Liquidity is defined as how easily an asset can be converted into cash. For example, short-term investments in stocks and bonds are considered to be very liquid because they can be sold by simply calling a stock broker. Accounts receivable are considered to be liquid because you can sell them to banks. On the other hand, goodwill is not considered to be liquid because it is very difficult to sell.
The actual definition of current assets is assets that are likely to be converted into cash within one year or one operating cycle, whichever is longer. An operating cycle is the period of time from when a company first buys inventory or raw materials, until the company actually collects cash from selling the finished product. Almost all companies have operating cycles of less than a year. And so the definition of current assets – for most companies – will be assets likely to be converted into cash within one year. However, some companies – such as wineries and ship builders – have much longer operating cycles. These companies define current assets as assets that are likely to be converted into cash within one of their operating cycles. For example, if it takes five years to grow grapes, turn them into wine, age the wine, and sell it, then the winery would have a five year operating cycle.
Productivity and Current Assets
All business assets should generate revenues and net income. Before purchasing any assets, think about how they will ultimately increase your profits. Also keep enough cash and short-term investments handy to pay your bills.