CHAPTER 15
Managing Current Assets
Current assets are assets that could reasonably be converted into cash within one operating cycle or one year, whichever takes longer. An operating cycle begins when the firm invests cash in the raw materials used to produce its goods or services and ends with the collection of cash for the sale of those same goods or services. For example, if a company manufactures and sells candy products, its operating cycle begins when it purchases the raw materials for the products (e.g., sugar) and ends when it cycle of most businesses is less than one year, we tend to think of current assets as those assets that can be converted into cash in one year. Current assets consist of cash, marketable securities, accounts receivable, and inventories.
Cash comprises both currency and assets that are immediately transformable into cash. Marketable securities are securities that can be readily sold when cash is needed. Every company needs to have a certain amount of cash to fulfill immediate needs, and any cash in excess of immediate needs is usually invested temporarily in marketable securities. Investments in marketable securities are simply viewed as a short-term place to store funds.
Accounts receivable are amounts due from customers who have purchased the firm’s goods or services but haven’t yet paid for them. To encourage sales, many firms allow their customers to “buy now and pay later,” perhaps at the end of the month or within 30 days of the sale. Accounts ...
