Page 53 - Finance for Non-Financial Managers

Siciliano03.qxd 2/8/2003 6:36 AM Page 34
Finance for Non-Financial Managers
34
Current Assets—Liquidity Makes Things Flow
Simply put, current assets are assets that are cash or are
expected to become cash “currently,” that is, within the next 12
months. These are the assets that produce most of the liquidity
in a company and they are the main sources of working capital
for the business. Here are
Liquidity The ability to the most typical examples
meet current obligations of current assets.
with cash or other assets
that can be quickly converted to cash, Cash and Cash
to pay the bills as they come due. In Equivalents
other words, the company has Cash itself is the most liq-
enough cash or enough assets that uid asset of all and always
will become cash so that it is able to
the first item listed on any
write checks without running out of balance sheet. It includes
money.
Wonder Widget’s petty
Insolvency The opposite of liquidity, cash fund, all the compa-
not having enough money to pay bills
as they become due. Insolvency is ny’s checking accounts,
often a precursor to a creditor revolt and cash reserves. Cash
or even a bankruptcy filing. reserves might be kept in
the form of savings
accounts, bank certificates, money market accounts, short-term
investments, and similar cash-like assets.
Companies vary in their policies about listing all the details
of their various cash accounts: some will simply show “Cash” or
“Cash in banks,” while others will combine the details under a
caption such as “Cash and short-term investments” or the more
common caption used in our example, “Cash and cash equiva-
lents.” The important thing about all the items in this section is
that they can be spent almost immediately, if needed.

Accounts Receivable
Amounts due from customers and others are usually next in the
Current Assets section of the balance sheet. The largest of these
is usually called accounts receivable; it typically means trade
accounts or amounts due from customers as a result of sales