Current assets include those that are periodically renewed by a particular business entity. They are necessary for the latter for implementation and normal functioning. For a certain period of time, usually one year is taken, they go through one or more cycles. Compared with fixed assets, they are characterized by an increased turnover rate.
The composition of current assets (OA)
They are necessary for the implementation of the economic and managerial goals of the business entity. The manager or economist obtains the necessary information from the financial statements. Working capital (current assets) includes:
- Money and their equivalents. The former are appropriate funds at the cash desk of an economic entity and on demand accounts, and the latter are highly liquid financial investments that are easily transferred for the first time.
- Various financial investments. Various securities with a maturity of up to one year.
- Accounts receivable. Debt of individual counterparties to a legal entity.
- VAT on purchased items. Tax that is accepted for accounting, but which will be deducted upon the occurrence of additional conditions.
- Raw materials and components for production, goods in stock.
- Other OA. These include damaged or missing material assets that are not written off as production costs or those responsible.
Essence of OA Analysis
With their help, the following performance indicators of an economic entity are determined:
- liquidity;
- stability;
- profitability.
For the analysis of current assets are used dynamic indicators obtained from the financial statements.
The most important consideration is OA in the following circumstances:
- Implementation of tax audits. Using them, you can justify any emerging seasonal losses.
- The need for credit. Before issuing a loan, the bank checks the financial condition of the business entity. In this case, OA can act as collateral for credit obligations.
Current assets ratio
This name is used for abbreviation. Its full name is the turnover ratio of working capital.
With its help, the number of their transfers to cash and vice versa is determined. It is determined by the ratio of revenue received for a certain period (usually a year) to the average cost of OA for the same period.
The latter indicator is calculated as a quarter of the amount of average quarterly balances for the year.
This formula is for assessing the efficiency of use by an entity of the resources at its disposal.
Coefficient values
Different economic entities operate in various industries. In this regard, the coefficient considered above will differ for them. The highest indicator is typical for trading organizations, since they receive revenue in a short period of time. The lowest turnover is inherent in enterprises of culture and science.
In this regard, the analysis of this coefficient should be carried out only in the context of one industry.
Factors affecting its value are as follows:
- the nature of the economic entity;
- staff qualifications;
- type of raw materials used;
- volumes and rates of production, the duration of the production cycle.
Analysis of OA turnover ratios
The activity of an economic entity is recognized as profitable if the value of the coefficient is more than one. Therefore, the analysis of current assets can be carried out on this indicator,
The change in turnover ratio is studied in dynamics.
The growth of this indicator may be due to the following reasons:
- introduction of advanced technologies and innovations;
- decrease in the degree of current assets;
- growth in the level of work of an economic entity;
- better resource efficiency;
- growth in profits and sales.
An increase in this indicator can be achieved if appropriate work is carried out at all stages of the business entity.
The coefficient values are compared with last year's, determining the rate of its growth, as well as with industry average values.
Own OA
This indicator is used for financial analysis. Own current assets are called differently working capital. It shows the difference between the OA of an economic entity and its short-term obligations.
Thus, using this indicator, the ability of an economic entity to calculate the latter is determined if its current assets are realized.
Consequently, a legal entity will be considered all the more financially sound, the more it has its own working capital. If this indicator is negative, then this indicates that potential risks are characteristic of this business entity.
Concept of financial OA
These include cash and short-term financial investments.
The first ones show available assets in various currencies, available at the cash desk of an economic entity, on its current and current accounts, which are used to carry out current activities of a legal entity.
Financial current assets in the form of short-term financial investments are those for a period not exceeding one year, which are subject to free sale at any time interval. This includes investments in various securities, bank deposits and other instruments. Highly liquid financial investments are considered cash equivalents. This is due to the fact that they can be quickly transferred to them, which will ensure the fulfillment of the obligations of the economic entity to lenders.
When evaluating financial OA, the current liquidity ratio is calculated, which shows the percentage of short-term assets of a legal entity to its short-term liabilities. The most acceptable value for this indicator is 200%. This indicates that the business entity can fully cover its short-term obligations and at the same time it will have liquid funds to continue to carry out its economic activities.
The concept of non-current assets
All funds are divided into fixed and current. From the point of view of accounting, this classification is broader: current and non-current assets. The latter have a useful life exceeding one year. Working capital can be easily converted into cash. Thus, the liquidity of an economic entity will be the higher, the more OA in it.
In the balance sheet of the organization, all assets are divided into current and non-current. The latter include the following:
- deferred tax assets - part of the corporate income tax that has been deferred and should in the future lead to its reduction, payable in subsequent tax periods;
- financial investments - various securities with a maturity of more than one year;
- fixed assets - means of labor with a period of use of more than 12 months; these include transport, transmission devices and structures, machinery and equipment, buildings;
- profitable investments in material values - those of the main assets of an economic entity that are intended to be provided by the owner for temporary use (rent) for income;
- exploratory material assets - these include those that are used in the search for minerals, exploration of their deposits, their assessment, as well as the costs of construction, equipment and transportation;
- search intangible assets - all those that are not related to the tangible form from the last paragraph;
- the results of development and research - the costs of an economic entity for R&D, as a result of which positive results were obtained, while they do not belong to the next group under consideration;
- intangible assets - exclusive rights to intellectual property considered in accounting;
- Other noncurrent assets.
Conclusion
All funds and resources available to an economic entity are divided into non-current and current assets. The latter include those that should be used for a short period of time, usually one year. This division is important for economists, because the more these assets a legal entity has, the higher its liquidity.