Current assets are assets that a company expects to convert to cash or use up within one year or its operating cycle, whichever is longer. In Franklin Corporation had current assets of $22,100. For most businesses, the cutoff for classification as current assets is one year from the balance sheet date. For example, accounts receivable are current assets because the company will collect them and convert them to cash within one year. Supplies is a current asset because the company expects to use the supplies in operations within one year.
Some companies use a period longer than one year to classify assets and liabilities as current because they have an operating cycle longer than one year. The operating cycle of a company is the average time required to go from cash to cash in producing revenue—to purchase inventory, sell it on account, and then collect cash from customers. For most businesses, this cycle takes less than a year, so they use a one‐year cutoff. But for some businesses, such as vineyards or airplane manufacturers, this period may be longer than a year. Except where noted, we will assume that companies use one year to determine whether an asset or liability is current or long‐term.
Common types of current assets are (1) cash, (2) investments (such as short‐term U.S. government securities), (3) receivables (accounts receivable, notes receivable, and interest receivable), (4) inventories, and (5) prepaid expenses (insurance and supplies). Companies list current assets in the order in which they expect to convert them into cash. Follow this rule when doing your homework.
presents the current assets of Southwest Airlines Co. in a recent year.
|SOUTHWEST AIRLINES CO.|
Balance Sheet (partial)
|Cash and cash equivalents||$1,355|
|Prepaid expenses and other current assets||418|
|Total current assets||$4,456|
As explained later in the chapter, a company’s current assets are important in assessing its short‐term debt‐paying ability.