In this paper the author will compare and contrast current and noncurrent assets. The author will also explain what the order of liquidity is and how the order of liquidity applies to the balance sheet.
Assets are ordinarily subdivided into current assets and noncurrent assets. Current Assets is a balance sheet item which equals the sum of cash and cash equivalents, accounts receivable, inventory, marketable securities, prepaid expenses, and other assets that could be converted to cash in less than one year. A company's creditors will often be interested in how much that company has in current assets, since these assets can be easily liquidated in case the company goes bankrupt. In addition, current assets are important to most companies as a source of funds for day-to-day operations.
For most businesses, the cutoff for classification as current assets is one year from the balance sheet date (Kimmel, Weygandt, & Kieso, 2007). For example, accounts receivable are current assets because the company will collect them and convert them to cash within one year. Supplies is a current asset because the company expects to use it up in operations within one year (Kimmel et al.). Some companies use a period longer than one year to classify assets and liabilities as current because they have an operating cycle longer than one year. The operating cycle of a company is the average time that it takes to purchase inventory, sell it on account, and collect cash from customers (Kimmel et al.). For most businesses, this cycle takes less than a year, so they use a one-year cutoff. But for some businesses, such as vineyards or airplane manufacturers, this period may be longer than a year. Common types of current assets are (1) cash, (2) short-term investme ...