Current assets are assets that the company expects to be able to convert into cash or use up within one year. Items that can be included under the current assets heading would be cash, short-term investments, receivables, inventory, and prepaid expenses. Short-term investments can include U.S. government securities, treasury bills, and Certificate of Deposits. Short-term investments are an alternate to storing excess money in a bank and allow the company to earn more interest on their money then they would if they chose to deposit the money in the bank (Wikinvest, 2012). Receivables can include accounts receivable, notes receivable, and interest receivable. These are all money that is owed to the company and is expected to be paid within one year. Prepaid expenses are assets that are paid in advance and can include supplies and insurance. Current assets are listed in the order in which they are expected to be converted into cash (Kimmel, Weygandt, & Kieso, 2003).
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This section covers the assets that the company is going to being using for a long time in their operating activities. This includes any equipment necessary for producing products, land and building currently being used by the company, delivery equipment, and furniture. Some of these assets will depreciate over time, which just means that the assets will lose value over time with use. This section of the balance sheet shows the value of the equipment, at cost, minus the depreciation of the equipment.
Next there are intangible assets which can also be reported under a broader heading of other assets (Kimmel, Weygandt, & Kieso, 2003). These assets are very valuable to a company even though they are not a physical object. These assets often include patents, copy writes, and trademarks or trade names. These assets give one company exclusive rights to manufacture a product, or use a specific name or icon for a specific amount of time. This is a great asset for a company to have because it means that they will be able to make more money on a product while they hold the patent or copy write since no other company will be able to reproduce the product while the patent is in effect.
Evaluating a company’s current assets is a good way to determine the company’s ability to pay their short-term debts. This section of the balance sheet can show the success or failure of a business because it shows where the company is going to be getting immediate funds from. A company that does not have a good amount of current assets may find themselves in trouble if they acquire some unexpected expenses, such as equipment breaking down. These assets are the easiest and fastest to turn into cash when needed.
When all of the assets are combined on the balance sheet a user can really compare and see where the majority of the company’s assets are. If the most of the company’s assets are in current assets then they will be able to pay short-term debts but may have more difficulty with long-term debts. If a company has more assets in long-term assets they will be able to pay long-term debts but may find difficulty with their short-term debts. A company really wants a good balance between all of the described assets to be able to run smoothly for the foreseeable future.