Current assets are cash and other assets or resources commonly identified as those which are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business (ARB No. 43, Chapter 3A, paragraph 4). The yardstick is that cycle rather than a flat twelve months: a one-year period is used where several operating cycles occur within a year, the longer period is used where the cycle runs beyond twelve months, and the one-year rule governs a business with no clearly defined cycle (ARB No. 43, Chapter 3A, paragraph 5).
On a classified balance sheet current assets are the first block on the asset side, subtotalled before anything noncurrent appears, and that subtotal is the figure current liabilities get measured against. Long-term liabilities works that cycle measurement out and records the bulletin’s supersession by the Codification, which the Board built on the overall principle that it should not change GAAP (FASB Statement of Financial Accounting Standards No. 168, paragraph A20).
What Counts as a Current Asset
The bulletin names seven categories, lettered (a) through (g) (ARB No. 43, Chapter 3A, paragraph 4).
- (a) Cash available for current operations, and items which are the equivalent of cash.
- (b) Inventories of merchandise, raw materials, goods in process, finished goods, operating supplies, and ordinary maintenance material and parts.
- (c) Trade accounts, notes, and acceptances receivable.
- (d) Receivables from officers, employees, affiliates, and others, if collectible in the ordinary course of business within a year.
- (e) Instalment or deferred accounts and notes receivable, if they conform generally to normal trade practices and terms within the business.
- (f) Marketable securities representing the investment of cash available for current operations.
- (g) Prepaid expenses such as insurance, interest, rents, taxes, unused royalties, current paid advertising service not yet received, and operating supplies.
Several of those categories carry a condition rather than a description, and the conditions are where a client’s classification usually goes wrong. A loan to an officer belongs here only while it stays collectible inside a year, and a holding is a marketable security in this sense only where it represents cash available for current operations.
The bulletin then names what the classification leaves out. Cash and claims to cash restricted as to withdrawal or use for other than current operations, designated for expenditure in the acquisition or construction of noncurrent assets, or segregated for the liquidation of long-term debts sit outside it, as do investments in securities, whether marketable or not, or advances made for the purposes of control, affiliation or other continuing business advantage, receivables arising from unusual transactions which are not expected to be collected within twelve months, cash surrender value of life insurance policies, land and other natural resources, depreciable assets, and long-term prepayments or deferred charges (ARB No. 43, Chapter 3A, paragraph 6). What those exclusions do to a liquidity measure, and why prepaid expenses qualify without ever becoming cash, are worked through in quick ratio.
The Captions That Carry the Balances
Regulation S-X, the SEC rule setting out the line items that should appear on a filed balance sheet, runs the class through nine captions in a set order: cash and cash items at 1, marketable securities at 2, accounts and notes receivable at 3, allowances for doubtful accounts and notes receivable at 4, unearned income at 5, inventories at 6, prepaid expenses at 7, other current assets at 8, and total current assets at 9 (17 CFR 210.5-02). Whether that last subtotal appears at all is conditional, which is the point classified balance sheet turns on.
Two of those nine captions are deductions, not additions, and a section that adds captions 1 through 8 straight down foots wrong. Allowances for doubtful accounts and notes receivable at caption 4 is set forth separately in the balance sheet or in a note rather than folded into the receivable balance, the presentation accounts receivable works through (17 CFR 210.5-02).
Unearned income at caption 5 is the one that reads like an error, because income sitting inside an asset block looks misfiled. What sits there is a deduction against the receivable it came from. Unearned discounts other than cash or quantity discounts and the like, finance charges, and interest included in the face amount of receivables should be shown as a deduction from the related receivables (ARB No. 43, Chapter 3A, paragraph 10). A note written at a face amount with the interest baked in is carried down to what was actually advanced. That is narrower than the everyday sense of the phrase, because a collection received in advance of the delivery of goods or performance of services is a current liability rather than a deduction inside this block (ARB No. 43, Chapter 3A, paragraph 7).
Caption 8 carries a disclosure test of its own. Within other current assets, state separately, in the balance sheet or in a note thereto, any amounts in excess of five percent of total current assets (17 CFR 210.5-02). The threshold moves with the subtotal, so an amount that sat quietly inside the caption last year can need its own line this year with nothing about the amount itself having changed.
Those captions govern statements filed under Article 5 of Regulation S-X, which applies to all persons except registered investment companies, employee stock purchase, savings and similar plans, insurance companies, bank holding companies and banks, and brokers and dealers filing Form X-17A-5 (17 CFR 210.5-01). Most clients a US firm serves never file under it, so the caption set is a reference for what the class holds and in what order rather than a filing duty for them.
Footing a Current Assets Section
Say a filer’s year-end trial balance carries the current balances below, with the two deduction captions entered as deductions.
1 Cash and cash items 180,000
2 Marketable securities 45,000
3 Accounts and notes receivable 260,000
4 Allowances for doubtful accounts and notes receivable (18,000)
5 Unearned income (7,000)
6 Inventories 210,000
7 Prepaid expenses 24,000
8 Other current assets 31,000
9 Total current assets 725,000
five percent of total current assets 725,000 x 0.05 = 36,250
the wrong footing, the two deductions added instead of subtracted
180,000 + 45,000 + 260,000 + 18,000 + 7,000
+ 210,000 + 24,000 + 31,000 = 775,000
overstatement 50,000Nothing inside caption 8 reaches that five percent threshold here, so no part of it needs a line of its own. Add the two deductions instead of subtracting them and the class overstates by twice the contra balances, which inflates working capital and every ratio built on this subtotal.
The subtotal is not a liquidation value. The amounts at which various current assets are carried do not always represent their present realizable cash values, and practice varies with respect to the carrying basis for current assets such as inventories (ARB No. 43, Chapter 3A, paragraph 9).
What Current Assets Are Not
Total assets is the first confusion. Total current assets is caption 9 and total assets is caption 18, with the noncurrent captions 10 through 17 standing between them, running from securities of related parties through property, plant and equipment and its accumulated depreciation to other assets (17 CFR 210.5-02).
Fixed assets are the second. A fixed asset is held to be used rather than realized, so the same object can land on either side of the line depending on why the business holds it, and the tests that keep it noncurrent are set out in fixed assets.
Working capital is not a synonym for the class. It is the excess of current assets over current liabilities (ARB No. 43, Chapter 3A, paragraph 3), so current assets are one of its two inputs, and the current-liabilities test on the other side is drawn in long-term liabilities.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can put a block of its own current-asset classification and footing work through a trial task before anything client facing depends on it.
