Is Merchandise Inventory a Current Asset?
Yes, merchandise as inventory is a current asset.
A current asset is any asset that will provide an economic benefit for or within one year.
Inventory production is typically closely correlated with demand, so inventory usually sells within one year of being produced.
Therefore, inventory/merchandise is a current asset.
Is Merchandise Inventory a Current Asset FAQs
What Are Current Assets?
Current Assets Include
Usually the balance sheet will record current assets separately from other long-term assets or fixed assets, if applicable.
Likewise, the balance sheet will also draw a distinction between current liabilities, which are short-term debts that must be paid within a year, and long-term liabilities.
The ratio of current assets to current liabilities is called the current ratio and is used to determine a company’s ability to fulfill short-term obligations.
To find out a company’s current ratio, just divide its current assets by its current liabilities using the following equation:
Current Ratio = Current Assets / Current Liabilities
An important note is that only tangible assets can be counted as current.
Intangible assets such as trademarks, copyrights, intellectual property, and goodwill are not able to be converted easily into cash within a year, even if they still provide a company with economic value.
What Are Examples Of Current Assets?
There are five main categories of current assets.
In order of most to least liquid, here is a list of current assets:
1. Cash and Cash Equivalents
Cash and cash equivalents are the most liquid of assets, meaning that they can be converted into hard currency most easily.
Cash of course requires no conversion and is spendable as is, once withdrawn from the bank or other place where it is held.
Cash equivalents are any type of liquid securities that are not in the form of cash currently, but that will be in the form of cash within a year.
US Treasury bills, for example, are a cash equivalent, as are money market funds.
2. Short-Term Investments and Marketable Securities
Similar to cash equivalents, these are investments in securities that will provide a cash return within a single year.
These types of securities can be bought and sold in public stock and bonds markets.
In the case of bonds, for them to be a current asset they must have a maturity of less than a year; in the case of marketable equity, it is a current asset if it will be sold or traded within a year.
Marketable equity can be either common stock or preferred stock.
3. Prepaid Expenses
Prepaid expenses are funds that have been spent preemptively on goods or services to be received in the future.
They are not technically liquid because they don’t earn a company money; however, they are listed among a company’s current assets because they free up capital to be used later.
Payments to insurance companies or contractors are common prepaid expenses that count towards current assets.
A company can also choose to prepay rent it owes on buildings or real estate; however, only one year’s worth of that prepaid rent counts towards current assets.
If a company elects to pay for, say, three years of rent in advance, then the remaining 24 months of rent are not counted as a current asset.
4. Accounts Receivable
Accounts receivable are funds that a company is owed by customers that have received a good or service but not yet paid.
As usual, for these funds to be a current asset, they must be expected to be received within a year.
Accounts receivable are usually incurred when buyers pay a company for its products or services with credit.
Paying for a purchase with a credit card, for example, adds to the accounts receivable of the company from which the purchase was made.
If a business sells something to another business, the transaction also usually takes the form of a line of credit, adding to accounts receivable.
Notes receivable are also considered current assets if their lifespan is less than one year.
Any inventory that is expected to sell within a year of its production is a current asset.
Inventory is the least liquid of all current assets because unlike short-term securities, which will always pay within a year, and accounts receivable, which a customer is obligated to pay, inventory must be actively produced and sold in order to convert into cash.
Likewise, not all inventory can reasonably be expected to sell within a single year; heavy machinery, particularly specialized machinery like airplanes or industrial equipment, may sit around in storage for a while before finding a buyer.
Inventory that is purchased by consumers and moves quickly is known as fast moving consumer goods, or FMCG, and is the primary type of inventory that also falls under the category of current assets.
Current Assets Formula
The equation for current assets is the following:
Current Assets = C + CE + I + AR + MS + PE + OLA
- C = Cash
- CE = Cash Equivalents
- I = Inventory
- AR = Accounts Receivable
- MS = Marketable Securities
- PE = Prepaid Expenses
- OLA = Other Liquid Assets
What Are Noncurrent Assets?
Non-current assets are assets that have a useful life of longer than one year.
Common examples are property, plants, and equipment (PP&E), intangible assets, and long-term investments.
Client lists, patents, and intellectual property may also be long-term assets in some non-manufacturing industries.
Current assets reflect the ability of a company to pay its short term outstanding liabilities and fund day-to-day operations.
For this reason, a company’s “working capital”is known as the “current ratio”which divides current assets by current liabilities.
List of Current Assets
A list of the current assets a company owns will be available on the balance sheet. Typically these will be broadly categorized by type, such as short-term investments, inventory, and cash and cash equivalents. Current assets are often listed alongside long-term assets.
Examples of Current Assets
Depending on the industry of the company in question, a current asset could be anything from crude oil to foreign currency. For example, an auto manufacturer may count auto parts as a current asset. On the other hand, a mutual fund may count short term investments or bonds.
Current Assets Meaning
A current asset is any asset a company owns that will provide value for or within one year. Current assets are often used to pay for day-to-day-expenses and current liabilities (short-term liabilities that must be paid within one year). Current assets are important to ensure that the company does not run into a liquidity problem in the near future.
Non-Current Assets Examples
Examples of noncurrent, or fixed assets include property, plant, and equipment (PP&E), long-term investments, and trademarks as each of these will provide economic benefit beyond 1 year.
Current Assets and Current Liabilities
Current liabilities are essentially the opposite of current assets; they are anything that reduces a company’s spending power for one year. Examples include short term debts, dividends, owed income taxes, and accounts payable. Current liabilities are often resolved with current assets. If current liabilities exceed current assets, it could indicate an impending liquidity problem.