Current Assets & liabilities

 Current Assets

Current assets are cash and other assets or resources that are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business.

Note: The operating cycle is defined in the Master Glossary in the FASB 's Accounting Standards Codification ®  as the average time between the acquisition of materials or services and their final cash realization.

Per ASC 210-10-45-3, a one-year time period is to be used as the basis for the segregation of current assets when an entity has several operating cycles occurring within a year. However, if the period of an entity's operating cycle is greater than twelve months, for example as in the tobacco, distillery, and lumber businesses, the longer period is used as the entity's operating cycle. If an entity has no clearly defined operating cycle, the one-year rule governs.

Current assets are perhaps the easiest of the various sections of the balance sheet to identify. They include:

• Cash available for current operations, including coins, currency, Undeposited checks (checks that have been received but have not yet been deposited in the bank), money orders and drafts, and demand deposits.

Read Notes :- Non- Current Assets 

• Cash equivalents. Short-term, highly liquid investments that are convertible to known amounts of cash without a significant loss in value and have maturities of 3 months or less from the date of purchase.

• Marketable securities classified as current assets - Marketable debt and equity securities that represent the investment of cash available for current operations. Marketable securities Classified as trading securities are almost always current assets. Marketable securities other than trading securities may or may not be classified as current assets, depending on management's intention. Marketable debt securities classified as available-for-sale are current assets if they are considered working capital available for current operations, regardless of their maturity dates. Marketable debt securities classified as held-to-maturity are current assets only if their maturity is within one year or the length of the firm's operating cycle, whichever is longer. Marketable equity securities may or may not be classified as current assets, depending on management's intention.

Receivables. Trade accounts receivable, notes receivable, and acceptances receivable. Receiva bles from officers, employees, affiliates and others are also current assets if they are collectible in the ordinary course of business within one year or the firm's operating cycle.

Contract assets classified as current assets. Under the revenue recognition standard, ASC 606, contract assets represent an entity's right to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditional on something other than the passage of time, for example the entity's future performance, before the entity can invoice the customer. Contract assets may be current assets or non-current assets or both, depending on the facts and circumstances such as when receipt of payment is expected, based on the agreement with the customer. Contract assets are explained in the Revenue Recognition topic in this volume.

Short-term notes receivable if they conform generally to normal trade practices and terms within the business.

Inventories. Merchandise on hand and available for sale and, for a manufacturer, raw materials and work-in-process as well as finished goods. Operating supplies and ordinary maintenance ma- terial and parts are also inventories.

Prepaid expenses. Amounts paid in advance for the use of assets such as rent paid at the begin- ning of a rental period or amounts paid for services to be received at a future date. An insurance premium paid at the beginning of a policy period for insurance coverage to be received during the portion of the future policy period that will occur during the coming operating cycle is a current prepaid expense. Prepaid expenses are not convertible to cash, but they are classified as current assets because they would have required the use of current assets during the coming operating cycle if the expenses had not been prepaid.

Funds that are restricted for current purposes. If cash or cash equivalents are being held for a current purpose, such as for payment of current obligations due within a year or the operating cycle, whichever is longer, or as a compensating balance to support short-term borrowing, the cash should be reported on a separate line in the current assets section of the balance sheet.

Current Liabilities

Current liabilities are obligations that will be settled through the use of current assets or by the creation of other current liabilities.

Examples of current liabilities include:

• Accounts payable and trade notes payable due to suppliers for purchase of goods and services.

• Dividends payable.

• Contract liabilities representing an entity's obligation under ASC 606, the revenue recognition standard, to transfer goods or services to a customer for which the entity has received Consideration from the customer. Contract liabilities may be current liabilities or non-current liabilities or both, depending on the facts and circumstances such as when the entity expects to satisfy its performance obligations and how it satisfies its performance obligations-over time or at a point in time.

• Agency collections such as employee tax withholdings and sales taxes, where the company acts as agent for another party (the government) and is obligated to remit the payments.

•Obligations due on demand according to their terms, such as demand notes.

• Short-term (30-, 60-, 90 day) notes.

• Current portions of long-term debt and lease liabilities (the portions of the principal due within the operating cycle, usually twelve months).

• Taxes payable, wages payable, and other accruals.

• Long-term obligations callable at the balance sheet date due to some violation by the company such as a violation of a loan covenant.9

• Assurance-type warranties 10 for which the term of the warranty extends only into the next ac- counting period or the portion of a longer-term warranty that extends only into the next accounting period.

Current liabilities do not include:

• Debts to be paid by funds in accounts classified as non-current.

• The portion of a short-term obligation intended to be refinanced by a long-term obligation, subject to fulfilling requirements as noted below.

Note: If the company is able to demonstrate that it has the intent and the ability to refinance an obligation that is coming due in the next twelve months, it may reclassify that obligation on the balance sheet as a non-current liability. Having a commitment from a bank for long-term financing of the obligation is an example of a way to demonstrate the ability to refinance it.

For example, when a company is able to show that it has the intent and the ability to refinance an obligation that is due in nine months, the company can show the obligation on its balance sheet as a non-current liability because management knows it will use the funds received from the future long-term financing to settle the existing debt. The company is replacing one kind of debt with another kind of debt.