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What are Short-Term Assets?

Short-Term Assets

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Short-Term Assets

Short-term assets, also known as current assets, refer to assets that are expected to be converted into cash, sold, or consumed within a short period, typically within one year or within the business’s normal operating cycle (whichever is longer). They play a crucial role in assessing a company’s liquidity and its ability to meet short-term obligations.

Examples of short-term assets include:

  • Cash and Cash Equivalents: This includes currency, bank balances, and short-term investments that can be quickly converted into cash, such as money market funds.
  • Accounts Receivable: Amounts owed to the business by its customers for goods or services sold on credit. These are expected to be collected within a short time frame, typically 30 to 90 days.
  • Inventory: Goods available for sale, raw materials, and work-in-progress items. Businesses expect to sell these items and convert them into cash within one year or an operating cycle.
  • Prepaid Expenses: Payments made in advance for goods or services to be received in the future. For example, a company might prepay its rent or insurance for the next six months. As the months pass, the prepaid amount is gradually expensed and reduced.
  • Short-Term Investments: Investments that a company intends to sell within one year, such as stocks or bonds of other companies.
  • Marketable Securities: Debt or equity securities that are easily sold in the financial markets.
  • Notes Receivable: Short-term loans made by the company to other entities, due within one year.
  • Other Current Assets: This category may include other assets that don’t fit neatly into the categories above but are still expected to be realized in cash or used up within the business’s next operating cycle or year.

On a company’s balance sheet, these short-term assets appear under the “Current Assets” section. By comparing current assets to current liabilities, one can derive liquidity ratios, such as the current ratio, which helps assess a company’s ability to cover its short-term obligations.

Example of Short-Term Assets

Let’s consider a fictional company called OceanView Electronics to provide a snapshot of its short-term assets as they might appear on a balance sheet:

OceanView Electronics – Balance Sheet (Extract)
As of December 31, 2023

CURRENT ASSETS:

  • Cash and Cash Equivalents: $500,000
    • Includes cash in bank, money market funds, and other liquid funds.
  • Accounts Receivable: $300,000
    • Amounts due from customers for electronic goods sold on credit.
  • Inventory: $250,000
    • Broken down as:
      • Raw materials: $100,000
      • Work-in-progress: $50,000
      • Finished goods: $100,000
  • Prepaid Expenses: $50,000
    • Advance payments for rent, utilities, and insurance for the upcoming months.
  • Short-Term Investments: $100,000
    • Investments in stocks and bonds of other tech companies that OceanView plans to sell within the year.
  • Marketable Securities: $75,000
    • Easily tradable debt securities purchased for potential short-term gains.
  • Notes Receivable: $25,000
    • Short-term loans given to a smaller vendor with an agreement to pay back within the year.

TOTAL CURRENT ASSETS: $1,300,000

From the above extract:

  • OceanView Electronics has a total of $1,300,000 in short-term assets.
  • These assets are crucial for the company’s day-to-day operations and can be used to finance its short-term obligations.
  • If we had the company’s current liabilities, we could compare them with the current assets to assess liquidity ratios like the current ratio.

This example provides a glimpse of how short-term assets might be presented in a company’s balance sheet. Each line item would have further details and breakdowns available in the company’s financial notes or statements.

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