Chapter 8: Overview of Working Capital ManagementJust click on the button next to each answer and you'll get immediate feedback.Note: Your browser must support JavaScript in order to use this quiz. Show
1. In finance, "working capital" means the same thing astotal assets. fixed assets. current assets. current assets minus current liabilities. 2. Which of the following would be consistent with a more aggressive approach to financing working capital?Financing short-term needs with short-term funds. Financing permanent inventory buildup with long-term debt. Financing seasonal needs with short-term funds. Financing some long-term needs with short-term funds. 3. Which asset-liability combination would most likely result in the firm's having the greatest risk of technical insolvency?Increasing current assets while lowering current liabilities. Increasing current assets while incurring more current liabilities. Reducing current assets, increasing current liabilities, and reducing long-term debt. Replacing short-term debt with equity. 4. Which of the following illustrates the use of a hedging (or matching) approach to financing?Short-term assets financed with long-term liabilities. Permanent working capital financed with long-term liabilities. Short-term assets financed with equity. All assets financed with a 50 percent equity, 50 percent long-term debt mixture. 5. In deciding the appropriate level of current assets for the firm, management is confronted witha trade-off between profitability and risk. a trade-off between liquidity and marketability. a trade-off between equity and debt. a trade-off between short-term versus long-term borrowing. 6. varies inversely with profitability.Liquidity. Risk. Blue. False. 7. Spontaneous financing includesaccounts receivable. accounts payable. short-term loans. a line of credit. 8. Permanent working capitalvaries with seasonal needs. includes fixed assets. is the amount of current assets required to meet a firm's long-term minimum needs. includes accounts payable. 9. Financing a long-lived asset with short-term financing would bean example of "moderate risk -- moderate (potential) profitability" asset financing. an example of "low risk -- low (potential) profitability" asset financing. an example of "high risk -- high (potential) profitability" asset financing. an example of the "hedging approach" to financing. 10. Net working capital refers tototal assets minus fixed assets. current assets minus current liabilities. current assets minus inventories. current assets. Retake Quiz Multiple-Choice Quiz questions are Copyright © by Pearson Education Limited. Used by permission. All rights reserved. Previous Quiz |Back to Main Index | Next QuizThe Current Assets account is a balance sheet line item listed under the Assets section, which accounts for all company-owned assets that can be converted to cash within one year. Assets whose value is recorded in the Current Assets account are considered current assets. Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets. Current Assets may also be called Current Accounts. Key Takeaways:
1:48 Current AssetsUnderstanding Current AssetsPublicly-owned companies must adhere to generally accepted accounting principles and reporting procedures. Following these principles and practices, financial statements must be generated with specific line items that create transparency for interested parties. One of these statements is the balance sheet, which lists a company's assets, liabilities, and shareholders' equity. Current Assets is always the first account listed in a company's balance sheet under the Assets section. It is comprised of sub-accounts that make up the Current Assets account. For example, Apple, Inc. lists several sub-accountss under Current Assets that combine to make up total current assets, which is the value of all Current Assets sub-accounts.  This section is important for investors because it shows the company's short-term liquidity. According to Apple's balance sheet, it had $135 million in the Current Assets account it could convert to cash within one year. This short-term liquidity is vital—if Apple were to experience issues paying its short-term obligations, it could liquidate these assets to help cover these debts. Depending on the nature of the business and the products it markets, current assets can range from barrels of crude oil, fabricated goods, inventory for works in progress, raw materials, or foreign currency. Types of Current AssetsMany assets can be considered current by different businesses throughout all industries. In general, most industries group their current assets into these sub-accounts; however, you might see others:
On the balance sheet, the Current Asset sub-accounts are normally displayed in order of current asset liquidity. The assets most easily converted into cash are ranked higher by the finance division or accounting firm that prepared the report. The order in which these accounts appear might differ because each business can account for the included assets differently. Cash and Cash EquivalentsBy definition, assets in the Current Assets account are cash or can be quickly converted to cash. Cash equivalents are certificates of deposit, money market funds, short-term government bonds, and treasury bills. To qualify as current assets, these items must not have any restrictions that inhibit their short-term liquidity. Marketable SecuritiesMarketable Securities is the account where the total value of liquid investments that can be quickly converted to cash without reducing their market value is entered. For example, if shares of a company trade in very low volumes, it may not be possible to convert them to cash without impacting their market value. These shares would not be considered liquid and, therefore, would not have their value entered into the Current Assets account. Accounts ReceivableAccounts Receivable—the value of all money due to a company for goods or services delivered or used but not yet paid for by customers—is entered in Current Assets as long as the accounts can be expected to be paid within a year. If a business makes sales by offering longer credit terms to its customers, some of its receivables may not be included in the Current Assets account. If an account is never collected, it is entered as a bad debt expense and not included in the Current Assets account. It is also possible that some receivables are not expected to be collected on. This consideration is reflected in the Allowance for Doubtful Accounts, a sub-account whose value is subtracted from the Accounts Receivable account. InventoryInventory—which represents raw materials, components, and finished products—is included in the Current Assets account. However, different accounting methods can adjust inventory; at times, it may not be as liquid as other qualified current assets depending on the product and the industry sector. For example, there is little or no guarantee that a dozen units of high-cost heavy earth-moving equipment may be sold over the next year, but there is a relatively high chance of a successful sale of a thousand umbrellas in the coming rainy season. For these reasons, you should view inventory with a skeptical eye. Read through the company reports or browse the internet to determine what is going on with a company's inventory—it might also just be standard practice or a trend in the industry for inventory to be at specific levels. Inventory also blocks working capital. If demand shifts unexpectedly—which is more common in some industries than others—inventory can become backlogged. Prepaid LiabilitiesPrepaid expenses—which represent advance payments made by a company for goods and services to be received in the future—are considered current assets. Although they cannot be converted into cash, they are payments already made. These payments free up capital for other uses. Prepaid expenses might include payments to insurance companies or contractors. Other Short-Term InvestmentsMany companies categorize liquid investments into the Marketable Securities account, but some can be accounted for in the Other Short-Term Investments account. An example would be excess funds invested in a short-term security, putting the funds to work but keeping the option of accessing them if needed. Current Assets vs. Non-Current AssetsIf current assets are those which can be converted to cash within one year, non-current assets are those which cannot be converted within one year. On a balance sheet, you might find some of the same asset accounts under Current Assets and Non-Current Assets. This is because those same types of assets might be tied up for a longer period, such as a marketable security that cannot be sold in one year's time or which would be sold for much less than their purchase price. Property, plants, buildings, facilities, equipment, and other illiquid investments are all examples of non-current assets because they can take a significant amount of time to sell. Non-current assets are also valued at their purchase price because they are held for longer times and depreciate. Current assets are valued at fair market value and don't depreciate. Formula for Current AssetsThe total current assets formulation is a simple summation of all the assets that can be converted to cash within one year. If a current asset subcategory is not listed in this formula, you can add it to Other Liquid Assets. You gather the current asset information from a balance sheet and add it. Typically, it is already totaled up for you on the balance sheet under Total Current Assets: Current Assets = C + CE + I + AR + MS + PE + OLAwhere:C = CashCE = Cash EquivalentsI = InventoryAR = Accounts ReceivableMS = Marketable SecuritiesPE = Prepaid ExpensesOLA = Other Liquid Assets\begin{aligned} &\text{Current Assets = C + CE + I + AR + MS + PE + OLA}\\ &\textbf{where:}\\ &\text{C = Cash}\\ &\text{CE = Cash Equivalents}\\ &\text{I = Inventory}\\ &\text{AR = Accounts Receivable}\\ &\text{MS = Marketable Securities}\\ &\text{PE = Prepaid Expenses}\\ &\text{OLA = Other Liquid Assets}\\ \end{aligned}Current Assets = C + CE + I + AR + MS + PE + OLAwhere:C = CashCE = Cash EquivalentsI = InventoryAR = Accounts ReceivableMS = Marketable SecuritiesPE = Prepaid ExpensesOLA = Other Liquid Assets Real-World ExampleLeading retailer Walmart Inc.'s (WMT) Total Current Assets for the 2021 fiscal year was $90 billion:
In comparison, for FY 2021, Microsoft Corp.'s (MSFT) Total Current Assets was $184.4 billion:
How Do Investors Use Current Assets?The total current assets figure is of prime importance to company management regarding the daily operations of a business. As payments toward bills and loans become due, management must have the necessary cash. The dollar value represented by the total current assets figure reflects the company’s cash and liquidity position. It allows management to reallocate and liquidate assets—if necessary—to continue business operations. Creditors and investors keep a close eye on the Current Assets account to assess whether a business is capable of paying its obligations. Many use a variety of liquidity ratios, representing a class of financial metrics used to determine a debtor's ability to pay off current debt obligations without raising additional funds. Financial Ratios That Use Current AssetsThe following ratios are commonly used to measure a company’s liquidity position. Each ratio uses different Current Assets sub-accounts compared against the value of a company's Current Liabilities account:
The cash ratio is the most conservative as it considers only cash and cash equivalents. The current ratio is the most accommodating and includes various assets from the Current Assets account. These multiple measures assess the company’s ability to pay outstanding debts and cover liabilities and expenses without liquidating its fixed assets. What Are Current and Non-Current Assets?Current Assets is an account where assets that can be converted into cash within one fiscal year or operating cycle are entered. Non-Current Assets is an account where assets that cannot be quickly converted into cash—often selling for less than the purchase price—are entered. What are Some Examples of Current Assets?The Current Assets account can be found on a firm's balance sheet. Common examples of Current Assets accounts include:
What Are 10 Current Assets?Current assets generally fall under one of six sub-accounts in the Current Assets account: Cash and Cash Equivalents, Inventory, Accounts Receivable, Marketable Securities, Prepaid Expenses, and Other Liquid Assets. However, other current asset accounts are specific to industries and businesses, such as Non-Trade Receivables, Restricted Cash, Net Receivables, or Current Deferred Assets. What Are 3 Types of Current Assets?Of the many types of Current Assets accounts, three are Cash and Cash Equivalents, Marketable Securities, and Prepaid Expenses. The Bottom LineCurrent assets are any asset a company can convert to cash within a short time, usually one year. These assets are listed in the Current Assets account on a publicly traded company's balance sheet. What is not included in current assets?Property, plant and equipment: These non-current assets are incorporate of both tangible and fixed assets and cannot be liquidated into cash easily. Which includes: Property like land, building, etc., Plant-like manufacturing companies.
Which of the following are included in current assets?Some examples of current assets include cash, cash equivalents, short-term investments, accounts receivable, inventory, supplies, and prepaid expenses.
Which of the following assets is not a part of the current asset?Land is regarded as a fixed asset or non-current asset in accounting and not a current asset.
Which among the following assets is excluded from current assets?Answer and Explanation: The answer is (c) Bonds. Current assets are assets that are easily converted to cash.
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