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How to Read a Balance Sheet: Current Assets

Motley Fool Staff
May 23, 2008

The first major component of the balance sheet is current assets. These assets can easily be converted to cash within one operating cycle -- the amount of time the company needs to sell a product and collect cash from that sale, often anywhere between 60 and 180 days.

Companies need current assets to fund their day-to-day operations. If current assets fall short, the company will have to scramble for other sources of short-term funding, either by taking on debt (hello, interest payments) or issuing more stock (hello, shareholder dilution).

There are five main kinds of current assets:

  • Cash and equivalents
  • Short- and long-term investments
  • Accounts receivable
  • Inventories
  • Prepaid expenses

Cash and equivalents
These assets are literally money in the bank: cold, hard cash or something equivalent, like bearer bonds, money market funds, or vintage comic books. (OK, maybe not that last one.) As completely liquid assets, cash and equivalents should get special respect from shareholders. If a company had nothing better to do with these funds, it could mail them straight to you as a fat dividend, or use them to buy back shares and boost the value of your stock.

Short-term investments
These represent the next step above cash and equivalents. They normally come into play when a company has so much cash on hand that it can afford to tie some of it up in bonds lasting less than one year. This money can't immediately be liquefied without some effort, but it does earn a higher return than plain old cash. Cash and investments give shares immediate value, and while they're not entirely easy to liquidate, in a pinch they can be distributed to shareholders with minimal effort.

Accounts receivable
Normally abbreviated as A/R, these are funds that custo