1. Current Assets

Let's talk about current assets. We're trying to figure out what does current mean, and current is in opposition to obviously non-current, or another word for that would be long-term assets. So we've got two kinds of assets. We've got current assets. We've got non-current assets. So in accounting, current means able to be turned into cash or used up. So it's a current asset if we can turn it into cash or we just use it. So let's say it's a prepaid insurance or it's cash itself. If we can turn it into cash or we can use it up in less than one year. And this is the important part.

If we can turn it into cash or we can use it in less than one year, then it's a current asset. So let's talk about how we can identify those, and then we're gonna come back, and I'm going to address this one year because one year isn't always the case, but 95% of the time, one year is what you're looking for. Okay. So what is a current asset? Well, a current asset can be turned into cash or used up within a year. So one of them that your teachers are gonna love to put is marketable securities.

So you'll see this on a list of assets and you're gonna be asked, "Is this a current or non-current asset?" So it's gonna say current or non-current. Then of course the question becomes, what the heck is a marketable security? Well, it is a security that is able to be marketed, that has a market for this security.

What do we mean by there's a market for this security? Well, let's think about the job market. If you come out of college with an accounting degree, there's a good market for that degree, right? Which means you're gonna get hired quickly, you'll be able to find a job. There's a big demand for those jobs, et cetera. So what does it mean when we say that the security is marketable? Well, just in the same way that an accounting degree is marketable, it means a security is marketable, meaning there's a market for it. You can sell it. Lots of people want to buy it, and so you can sell it relatively quickly.

So when you see marketable security, you should think to yourself, this security is marketable. A lot of people wanna buy it. There's a big market for this security, meaning if I wanted to sell it, then I could sell it easily in less than a year, making it a current asset.

And so like I've said a hundred times before, you just need to be able to break down the words and try to figure out for yourself what these words actually mean. A marketable security is a security that can be marketed, which means it can be sold, which means it's current. Some other standard ones that you're gonna see: cash, because it can be converted to cash because it is already cash. So we know that that's a current asset. What about accounts receivable?

So these are accounts or money that we are able to receive, and so that means it's a current asset also because we're able to receive those. It's relatively likely that we'll be able to convert those into cash in less than one year.

Now what about the ones that we can use up? So these two and this one up here, those are ones that we can convert into cash in less than a year. And I said up above, I said it can be converted into cash or it can be used up. So what are some of the ones that can be used up? Well, inventory, that can be used up in less than a year. I mean, at least hopefully, right? At least you're selling your inventory and it takes less than a year to sell it. So we're gonna say that's current. What about like office supplies?

Those are an asset because you're gonna get some economic benefit from those in the future. But office supplies are gonna be used up within a year almost definitely. So we're gonna call those current also. And then the last one is you're gonna have lots of prepaids. So what is a prepaid? Well, a prepaid is prepaid insurance.

So this is insurance, let's say, insurance for the whole year that you pay upfront. So if you pay $1,000 a month for insurance, but in January you pay $12,000, then you've prepaid your insurance.

And as the months go on, as each month goes on, part of that prepaid insurance is being used up. And so it's being used up within a year. So your prepaids are gonna be current assets as well.

And this isn't just limited to insurance. You could have prepaid rent or any other prepaid expense that your business might have. So it's not just insurance. It can be insurance, but really it's any expense that your business might have. So these are the most common ones that you're going to see on your tests. You're going to see marketable securities, and this is the one that's kind of confusing because, I mean, you know what cash is, right? But you may not know what marketable securities are. So like I laid out before, you can figure it out by saying it's securities where there's a pretty hot market for them, which means you can sell them pretty quickly.

So marketable securities, cash, accounts receivable, inventory, supplies, prepaids. This is going to cover about 98% of what you're going to see as current assets. You can figure out most of these on your own. We did marketable securities. Cash is obvious because the test is can you convert it to cash, and if it's cash already, your job is done. Accounts receivable, you expect to receive in probably less than 30 days or so. Inventory, you're going to sell pretty quickly. Office supplies, you're going to blow through pretty quickly. And prepaids, you're going to use up each month as the year goes on.

Okay, do you remember when I said current assets can be converted to cash or used up in less than one year? And then I put a little asterisk up next to it. Well, let's talk about that. So less than one year wasn't entirely accurate. It covers about, let's say, 97 to 98% of your use cases. But really, the rule is the maximum of your operating cycle or one year.

So of your operating cycle and one year, which one is greater? And that's why I say 97 to 98% of the time, one year is going to be the rule that you go on. So if you remember nothing else, remember one year. Now, you may need this on one or two questions, probably just one. But if your business has an operating cycle of greater than one year, let's say your business's operating cycle is two years. I don't know of a business that would do that. I can't even think of an example where the operating cycle would be two years. But it's totally possible, I guess.

So then current assets, this test becomes less than or equal to two years. Because it's really the maximum of your operating cycle or one year. And so most businesses are going to have, it's going to look like this. You're going to have the maximum of your operating cycle, which for most businesses is going to be one to two months, so let's say 45 days, or one year. Well, the maximum of 45 days and a year is a year. A year is the bigger one. And so most businesses are going to have an operating cycle here of less than one year. But just to be very technical, and so that you have all the information, less than one year really means less than the greater of, so less than the max of, operating cycle or one year.

And like I said, 98% of the time, you can just put in one year and be a-okay.