What are current assets and current liabilities?
Let’s define current assets and current liabilities, and then take a look at the current
assets and current liabilities on the balance sheets of two of the biggest companies in
the world.
Current assets and current liabilities are both groupings of accounts
on the balance sheet.
A balance sheet is a picture at a point in time (usually the end of the year, or the
end of the quarter) of what a company owns (on the left)
and what a company owes (on the right).
Besides assets (what a company owns) and liabilities (what a company owes to creditors), you will
also find a group of accounts on the right-hand side called equity, which represents the book
value of the shareholder capital.
Asset accounts are grouped in either current assets or non-current assets, and liabilities
accounts into current liabilities or non-current liabilities.
The difference between current and non-current in both cases is within one year (current)
versus longer than one year (non-current).
Current assets are cash and other assets that are expected to be converted
to cash within a year.
Some examples of accounts in Current Assets: Cash, Accounts Receivable (amounts to be received
from customers), Inventory (products available for sale), Prepaid Expenses (amounts paid
but not expensed yet).
Current Liabilities are amounts due to be paid to creditors within twelve months.
Some examples of accounts in Current Liabilities: Accounts Payable (amounts to be paid to suppliers),
Accrued Liabilities (an expense incurred but not yet paid), Short Term Debt.
So the difference between current and non-current assets is whether this asset will be converted
to cash within one year.
The difference between current and non-current liabilities is whether the amounts are due
within one year, or further out.
To understand current assets and current liabilities in real life, let’s look at the balance
sheet of Amazon of September 2019.
Assets on the left, totaling $199 billion.
Liabilities and equity on the right, also totaling $199 billion.
Current assets of $79 billion, and current liabilities of $72 billion.
Current assets are slightly bigger than current liabilities.
For every dollar of current liabilities, there is $1.10 of current assets.
In other words, the current ratio is 1.1.
Something that is very unusual for most companies, but actually quite common for tech companies,
is the large amount of cash and marketable securities.
$43 billion in the case of Amazon, an ample treasure chest which gives Amazon a lot of
flexibility to invest organically as well as pursue acquisitions.
Inventories are $19 billion.
This number excludes inventory related to fulfillment services where third-party sellers
sell through the Amazon site: the third-party seller owns that inventory, not Amazon.
Accounts receivable (after deducting the allowance for doubtful accounts) are $17 billion.
Non-current assets are $120 billion.
The two largest amounts in non-current assets are property, plant and equipment of $68 billion,
and operating leases of $23 billion.
Operating leases is a new item on the balance sheet, as the new accounting standard for
leases was adopted in 2019.
The corresponding amount on the liabilities side
is in the long term lease liabilities account.
In current liabilities, half of the total amount is in accounts payable.
Non-current liabilities are $70 billion.
Here comes the most exciting bit!
Are you ready?
Amazon’s working capital is a negative amount, which is a positive thing for the business
from the perspective of cash flow.
The sum of inventories and accounts receivable on the left is $36 billion, while the sum
of accounts payable and deferred revenue on the right is $43 billion.
So total net working capital is negative $7 billion, which means Amazon’s suppliers
and customers are “financing” Amazon for more than Amazon is financing its inventory
and customers.
Second example: the balance sheet of Apple of September 2019.
Assets on the left, totaling $339 billion.
Liabilities and equity on the right, totaling (you guessed it right!) $339 billion.
Current assets of $163 billion, current liabilities of $106 billion, so a current ratio of 1.54:
for every dollar of current liabilities, there is $1.54 of current assets.
Within current assets, unusual for most companies, but common for tech companies, an impressive
$101 billion of cash and marketable securities.
Then accounts receivable of $23 billion, and inventories of only $4 billion.
An item that is very specific to the Apple business model is vendor non-trade receivables.
Apple buys components, and then sells these onward to outsourcing partners that manufacture
sub-assemblies or assemble final products for the company.
In short: the vendor non-trade receivables in assets relate to components (raw material
inventory) for Apple’s products.
Non-current assets are $176 billion.
We see an enormous amount of marketable securities in here as well.
This is not a typo or double-count.
The $52 billion of marketable securities in current assets up above convert to cash in
less than a year, the $105 billion of marketable securities in non-current assets down below
take longer than a year to convert to cash.
On the current liabilities side, accounts payable is the largest line item.
And what Amazon calls “unearned revenue” is called “deferred revenue” on Apple’s
balance sheet.
For Apple, non-current liabilities are bigger than current liabilities, as Apple has issued
a lot of long-term debt.
Are you ready for the most exciting bit?
Apple’s working capital!
The sum of accounts receivable and inventory related assets on the left is $50 billion,
and the sum of accounts payable and deferred revenue on the right is $52 billion, so Apple’s
net working capital is negative $2 billion.
Current assets: cash and other assets that are expected to be converted to cash within a year.
Current liabilities: amounts due to be paid to creditors within twelve months.
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