Definition
The term current generally refers to something pertaining to the present time or happening now. In various business contexts, this term can have specific meanings.
- In Accounting: Current assets or liabilities are those that are expected to be used or paid within one fiscal year.
- In Finance: Current financial position refers to the immediate state of an individual’s or entity’s financial condition.
- In Business Management: Any activities, decisions, or strategies that are relevant for the present period or immediate future.
Examples
- Current Assets: Cash, inventory, and accounts receivable fall under current assets because they can be converted to cash within one year.
- Current Liabilities: Short-term debt, accounts payable, and any financial obligations due within the next 12 months.
- Current Ratio: A financial metric used to determine the liquidity of a company, calculated by dividing current assets by current liabilities.
Example Sentences
- The company’s current liabilities include accounts payable and short-term loans.
- Ensuring current assets are adequately managed is crucial for maintaining liquidity.
- The current ratio of the company remains solid, indicating good financial health.
Frequently Asked Questions
What are current assets?
Current assets are assets that a company expects to convert to cash, sell, or consume within one year or within its operating cycle, whichever is longer. Examples include cash, marketable securities, inventory, and accounts receivable.
What are current liabilities?
Current liabilities are a company’s debts or obligations that are due within one year. Examples include short-term loans, accounts payable, and accrued expenses.
What is the current ratio?
The current ratio is a financial metric used to evaluate a company’s ability to pay its short-term obligations with its short-term assets. It is calculated by dividing current assets by current liabilities.
How does ‘current’ differ from ’non-current’?
Current refers to assets or liabilities due within one year, while non-current refers to items that extend beyond one year, such as long-term investments or long-term debt.
Why is the current ratio important?
The current ratio is important because it provides insight into a company’s liquidity and financial health, helping stakeholders determine if the company can cover its short-term obligations.
Related Terms
- Current Assets: Assets expected to be converted into cash within one year.
- Current Liabilities: Debts or obligations due within one year.
- Current Ratio: A measure of a company’s liquidity calculated as current assets divided by current liabilities.
- Liquidity: The ease with which an asset can be converted into cash without affecting its market price.
Online References
- Investopedia: Current Assets
- Investopedia: Current Liabilities
- Investopedia: Current Ratio
Suggested Books for Further Studies
- “Financial Accounting: Tools for Business Decision Making” by Paul D. Kimmel, Jerry J. Weygandt, and Donald E. Kieso
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- “Financial Statement Analysis: A Practitioner’s Guide” by Martin S. Fridson and Fernando Alvarez
Fundamentals of Current: Accounting Basics Quiz
### What is included in current assets?
- [x] Cash, accounts receivable, inventory
- [ ] Long-term investments, property, and equipment
- [ ] Goodwill, patents, trademarks
- [ ] Deferred tax liabilities
> **Explanation:** Current assets include cash, accounts receivable, and inventory because they can be converted to cash within one year.
### Which of the following is a current liability?
- [ ] Long-term debt
- [x] Accounts payable
- [ ] Prepaid expenses
- [ ] Machinery
> **Explanation:** Accounts payable are due within a short period, typically within one year, making them a current liability.
### How do you calculate the current ratio?
- [ ] Current assets - current liabilities
- [ ] Current liabilities - current assets
- [ ] Total assets / total liabilities
- [x] Current assets / current liabilities
> **Explanation:** The current ratio is calculated by dividing current assets by current liabilities.
### Why is the current ratio useful?
- [ ] It assesses long-term investments.
- [x] It provides insight into liquidity.
- [ ] It measures profitability.
- [ ] It evaluates market share.
> **Explanation:** The current ratio is useful for providing insight into a company's liquidity, indicating its ability to cover short-term obligations.
### Which of the following items is not a current asset?
- [ ] Cash
- [ ] Marketable securities
- [ ] Accounts receivable
- [x] Loan payable in 2 years
> **Explanation:** A loan payable in 2 years is not considered a current asset, as it is not due within one year.
### What term best describes obligations due within the next year?
- [ ] Fixed Liabilities
- [ ] Non-current Liabilities
- [x] Current Liabilities
- [ ] Depreciated Liabilities
> **Explanation:** Current liabilities are those obligations that are due within one fiscal year.
### Which financial statement includes current assets and current liabilities?
- [x] Balance sheet
- [ ] Income statement
- [ ] Statement of cash flows
- [ ] Statement of retained earnings
> **Explanation:** The balance sheet includes both current assets and current liabilities.
### How does an increase in current assets affect the current ratio?
- [x] Increases it
- [ ] Decreases it
- [ ] No effect
- [ ] Makes it zero
> **Explanation:** An increase in current assets will generally increase the current ratio, enhancing the company’s perceived liquidity.
### What does a current ratio greater than 1 indicate?
- [ ] The company is insolvent.
- [x] The company can cover its short-term liabilities.
- [ ] The company has more debt than assets.
- [ ] The company relies on long-term debt.
> **Explanation:** A current ratio greater than 1 implies that the company has more current assets than current liabilities, indicating it can cover short-term obligations.
### Which component is necessary to calculate the current ratio?
- [x] Expecting current liabilities for the period
- [ ] The equity held by shareholders
- [ ] The company's net profit
- [ ] All outstanding shares
> **Explanation:** To calculate the current ratio, it is necessary to know the current assets and the current liabilities of the company for the period in question.
Thank you for exploring the term “current” with detailed explanations and tackling our comprehensive quiz! Keep striving for excellence in your financial and accounting knowledge.
