Wiley GAAP 2008

Perspective and Issues

Assets displayed on the balance sheet are the resources available to the reporting entity to support its current and future operations. To provide information about liquidity, the assets are often divided into current and noncurrent assets. Current assets consist of cash and other assets that are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business. When the normal operating cycle is less than one year, a one‐year period is used to distinguish current assets from noncurrent assets. If the operating cycle exceeds one year, the operating cycle is the proper period to use for current asset identification. When information about current assets is accompanied by information about current liabilities, readers of the financial statements can assess the amount of net working capital (current assets less current liabilities) possessed by the reporting entity and its current ratio (current assets divided by current liabilities). Each of those measures provides useful, and different, information about the liquidity of the reporting entity—that is, its ability to satisfy current obligations as they become due in the normal course of business.

Current assets usually include cash, short‐term investments, receivables, inventory, and prepaid expenses. This chapter discusses cash, receivables, and prepaid expenses. Chapter 8 discusses short‐term investments, and Chapter 9 discusses inventory. This chapter also discusses ...