Current and Noncurrent Assets

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CURRENT AND NONCURRENT ASSETS

The asset section of the balance sheet is normally divided into two basic components: current assets and noncurrent assets.

Current assets are cash and those other assets that will normally be converted into cash within a period of one year (or one operating cycle, if it is longer than a year). •Noncurrent assets are those assets that are not likely to be converted into cash in the normal operating cycle.

Current assets include items such as cash on hand or in the bank; amounts due from customers (accounts receivable); materials, supplies, or goods on hand (inventories); readily marketable securities that are expected to be sold within one year; and advance payments for insurance, rent, and the like (prepaid items). The listing of prepaid items as a current asset is justified if the advance payment will be used during the next operating period. If the prepayment is for a period longer than a year, only the portion applicable to the next year would be included as a current asset. When items are prepaid, they reduce the outlay of cash that might otherwise be required in future years. Noncurrent assets are also referred to as fixed assets or long-lived assets. This category includes such items as land, buildings, and equipment. These items are normally expected to last more than one year and cannot be sold (converted into cash) without disrupting the normal business operations. The distinction between current and noncurrent assets is made on the basis of intention or normal expectation rather than the ability to convert to cash. Thus, inventories of materials are classified as current because they would normally be disposed of within one year. A building that might be disposed of is just as easily treated as noncurrent if it would not be sold within a year of a normal business cycle. Identical assets may be classified differently when it is clear that they are being held for different purposes. Automobiles used in a...
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