Current and Noncurrent Assets

Current and Noncurrent Assets

The practice of accounting entails more than an understanding of debits and credits. Financial statements play an important role in operating a business, as do understanding the components that make up a company's financial statements. Many creditors rely on a company's financial statement when analyzing and extending credit. One area that creditors thoroughly analyze and review involves current, noncurrent assets, and liquidity.

Current assets relate to cash and other resources that can easily be converted into cash, usually within one year or an operating cycle. Current assets are the first component of the balance sheet. Current assets fund daily operations. Current include cash on hand, accounts receivable, inventory, prepaid insurance, and short-term investments. Current assets comprises of anything of value that maintains a high level of liquidity. A business that does not have sufficient current assets may cause a cash flow issue in relation to successfully running its daily operations.

Noncurrent assets refer to long-term assets. Noncurrent assets are not anticipated to be converted into cash within one year. Noncurrent assets include equipment, intangible assets, land, long-term investments, plant, and property. According to Investopedia, noncurrent assets are capitalized rather than expensed, meaning that the company allocates the cost of the asset over the number of years for which the asset will be in use, instead of allocating the entire cost to the accounting year in which the asset was purchased (Investopedia, 2013).

Both current and noncurrent assets are important to a business's financial picture. Current assets are for income generation and ready to use. Noncurrent assets are for profit generation and cannot readily be used. Combining both current and noncurrent assets calculates total revenue generated for a business. A majority of companies use a one-year period or operating cycle in classifying assets. However, some companies classify assets using an operating cycle with a term longer than one year. An example of this belongs in the cruise line manufacturing industry. The major difference in current and noncurrent asset classification relate to determining whether the period is less or more than one-year.

The proper presentment in accounting reports requires accountants to follow a particular liquidity order when designating financial items on a balance sheet. The order of liquidity relates to the arrangement of assets incorporated on a balance sheet based on the time length the asset will require to liquidate. For example, cash would be listed first then would be followed by other assets that quickly could be converted into cash. The order of liquidity follows this order cash, marketable securities, accounts receivable, inventory, fixed assets, and goodwill. Cash does not require any conversion. Marketable securities