Current Asset

Examples of Current Asset in the following topics:

• Current Ratio

  • It compares a firm's current assets to its current liabilities.
  • The current ratio is calculated by taking total current assets and dividing by total current liabilities.
  • If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations (current liabilities).
  • If the value of a current ratio is considered high, then the company may not be efficiently using its current assets, specifically cash, or its short-term financing options.
  • A high current ratio can be a sign of problems in managing working capital (what is leftover of current assets after deducting current liabilities).

• Acid Test Ratio

  • The acid-test, or quick ratio, measures the ability of a company to use its near cash or quick assets to pay off its current liabilities.
  • The acid-test ratio, also known as the quick ratio, measures the ability of a company to use its near cash or quick assets to immediately extinguish or retire its current liabilities.
  • Quick assets include the current assets that can presumably be quickly converted to cash at close to their book values.
  • Note that the calculation omits inventory and a different version of the formula involves subtracting inventory from current assets and dividing by current liabilities.
  • In general, the higher the ratio is, the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets).

• Terminology of Accounting

  • Two major asset classes are intangible assets and tangible assets.
  • Intangible assets are identifiable non-monetary assets that cannot be seen, touched or physically measured, are created through time and effort, and are identifiable as a separate asset.
  • Tangible assets contain current assets and fixed assets.
  • Current assets include inventory, while fixed assets include such items as buildings and equipment.
  • If liability exceeds assets, negative equity exists.

• Defining Current Liabilities

  • Current liabilities are usually settled with cash or other assets within a fiscal year or operating cycle, whichever period is longer.
  • Liabilities are reported on the balance sheet, along with assets and owner's equity.
  • A current liability can be defined in one of two ways: (1) all liabilities of the business that are to be settled in cash within a firm's fiscal year or operating cycle, whichever period is longer or (2) all liabilities of the business that are to be settled by current assets or by the creation of new current liabilities.
  • Another important point is that current liabilities are many times not "current" and are actually past due.
  • Current liabilities are debt owed and payable no later than the current accounting period.

• Defining Long-Lived Assets

  • Long-lived assets are those that provide a company with a future economic benefit beyond the current year or operating period.
  • Assets are economic resources.
  • Long-lived assets provide a company with a future economic benefit beyond the current year or operating period.
  • Since non-current, or long-lived, assets are expected to last for longer than one year, accounting treats long-lived assets differently according to their useful life.
  • When assets are expected to contribute to earnings for multiple years, such assets are referred to as long-lived, non-current or long-term assets.

• Reporting Current Liabilities

  • Current liabilities are reported first in the liability section of the balance sheet because they have first claim on company assets.
  • The presentation of the balance sheet should support the accounting equation of assets = liabilities + owner's equity.
  • Short-term, or current liabilities, are listed first in the liability section of the statement because they have first claim on company assets.
  • They are paid off with assets or other current liabilities .
  • Most current liabilities have a claim on cash or other assets.

• Impairment Recognition

  • Business assets should be tested for impairment when a situation occurs that causes the asset to lose value.
  • when an asset is badly damaged (negative change in physical condition)
  • the asset is set for disposal before the end of its useful life A loss on impairment is recognized as a debit to Loss on Impairment (the difference between the new fair market value and current book value of the asset) and a credit to the asset.
  • A loss on impairment is recognized as a debit to Loss on Impairment (the difference between the new fair market value and current book value of the asset) and a credit to the asset.The loss will reduce income in the income statement and reduce total assets on the balance sheet.
  • For an example, take a retail store that is recorded on the owner's balance sheet as a non-current asset worth USD 20,000 (book value or carrying value is USD 20,000).

• Return on Assets

  • The Return on Total Assets ratio measures how effectively a company uses its assets to generate its net income.
  • The Return on Total Assets ratio is similar to the Asset Turnover Ratio in that both measure how effective a business's assets are in generating returns for the business.
  • But while the asset turnover ratio is focused on the business's sales, return on assets is focused on net income.
  • You calculate the average value of the total assets by adding the value of the business's total assets at the beginning of the period and the value of the business's total assets at the end of the period.
  • This is generally done by comparing the current return on assets ratio to the company's past performance or to a competitor's ratio.

• Involuntary Conversion

  • Unlike a voluntary sale, involuntary conversion of assets can involve an asset exchange for monetary or non-monetary assets .
  • Monetary assets consist of cash or cash-equivalent assets.
  • The gain or loss is the difference between the proceeds received and the book value of the asset disposed of, updated for current depreciation expense.
  • If the value of the new asset exceeds the book value of the old asset, a gain is recognized.
  • The asset received is recorded on the balance sheet at the book value of the asset given up plus any cash paid.

• Basic Components of Asset Valuation

  • Accountants record gifts of plant assets at fair market value to provide information on all assets owned by the company.
  • Fair value is used in accordance with US GAAP (FAS 157), where fair value is the amount at which the asset could be bought or sold in a current transaction between willing parties, or transferred to an equivalent party, other than in a liquidation sale.
  • The reason for not using the book value of the old asset to value the new asset is that the asset being given up is often carried in the accounting records at historical cost.
  • The book value of a fixed asset asset is its recorded cost less accumulated depreciation.
  • An old asset's book value is usually not a valid indication of the new asset's fair market value.