What is a Current Asset?

A current asset, also known as a quick asset, refers to cash or an asset that a company can convert into cash quickly. Quick assets are under a subset known as current assets, and they do not include inventory. Note that to convert inventory into cash, you will need time. Therefore, the quick assets are the most highly liquid assets that a company can hold, including accounts receivable and marketable securities. Quick assets, however, do not include non-trade receivables like loans because they are difficult to convert into cash quickly.

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Calculating Current Assets

You can construct a quick ratio against the current ratio that equals the total current assets of a company, and this includes the company's inventories. You then divide the results by its current liabilities. You can use the following two formulas to calculate quick assets: 

Quick Assets = Cash + Marketable Securities + Accounts Receivable 

or

Quick Assets = Current Assets - Inventories - Prepaid Expenses 

Key Components of Current Assets

Liquid assets, cash, cash equivalents, marketable securities, inventory and prepaid liabilities are part of the current assets that a company has.  

• Accounts Receivable: This refers to the amount of money that the customers of a company owe that are expected to be paid within a year such as money for goods purchased and services delivered. Companies that offer sales of product on credit to customers often have a backlog of accounts receivable.
• Inventory: The inventory of a business refers to the raw materials and finished products that a company has. These are current assets because the products can be sold within a space of one year and the raw materials also transformed to finished products. Inventory are often regarded as liquid assets because they can be converted to money easily.
• Prepaid Expenses: Prepaid expenses are money paid by a company to vendors for goods and services yet to be received but scheduled to be received in the future. Payments for inventory or company vendors for items that are yet to be delivered are also categorized as current assets.

    When recorded on a company's balance sheet, current assets are ranked based on the order of their liquidity, that is, based on their chances of being converted to cash quickly. In most cases, cash often comes first when recording current assets on a company's balance sheet. The cash holdings of a company include petty cash, currency and checking accounts. After cash is recorded, other current assets such as cash equivalents, accounts receivable, prepaid expenses, inventory and marketable securities are recorded.

Ratios Using Current Assets or Their Components

There are different metrics used in calculating the current assets of a company, diverse factors are put into consideration when using each of these metrics. The following are the common ratios used in measuring the liquidity of a firm;

• The quick ratio: this calculates the most liquid assets of the company and the ability of the company to settle its short-term obligations. The current assets of the company are calculated in relation to its current liabilities.
• The current ratio: this ratio measures a company's ability to pay both short and long-term debt obligations.
• The cash ratio: This ratio examines the ability of a company to make an immediate payment for all short-term liabilities.

Example of Current Assets

Lets assume that Company XYZs balance sheet shows cash as well as cash equivalents of $2,219,000, net receivable worth $3,867,000, and short-term investments worth $1,416,000. XYZs company quick assets will be as follows: Quick Asset = $2,219,000 + $1,416,000 + $3,867,000 (7,502,000)