Companies must report at least the following line items, if material, under current assets: cash and cash equivalents, trade and other receivables, inventories, and financial assets.
Cash equivalents are highly liquid, short-term investments (generally 3 months or less) with minimal interest rate risk. They are reported either at amortized cost or fair value. The difference between their amortized cost and fair value is minimal. Examples include demand deposits at banks, T-bills, commercial paper, etc. These exclude amounts that are restricted for at least 12 months.
Marketable securities are debt/equity investments traded in the secondary markets such that their value can be determined from price information in the public market.
Trade receivables (also called accounts receivable) represent amounts owed to a company by its customers. They are typically reported at net realizable value (which is based on an estimate of collectability).
Analysts need to look at three things:
- a very high accounts receivable balance relative to revenue may indicate that a company is having trouble collecting cash,
- any increase in allowance for doubtful debts, which is subtracted from gross accounts receivable to arrive at the net realizable value, may indicate an increase in bad debts expense, and
- a high balance due from a few customers may indicate high concentration of credit risk.
Inventories are physical products available for sale either as raw materials, work-in-progress or finished goods.
Under IFRS, inventories are held at lower of cost or net realizable value (NRV). NRV equals estimated selling price less cost of completion and selling costs.
Under US GAAP, inventories are measured at lower of cost and NRV unless they are measured using last -in-first-out (LIFO) or retail inventory methods. When using LIFO or retail inventory methods, inventories are measured at the lower of cost or market value where market value is the current replacement cost an upper limit equal to NRV and lower limit NRV less a normal profit margin.
If the carrying amount of inventories falls below NRV (or market value), the loss is reflected in the income statement. IFRS allows a reversal of such a loss but US GAAP does not.
Other current assets
Other current assets include current assets that are not individually material. Companies usually disclose the components of other current assets in the notes.