More of this Feature • Lesson 3 Main • How to Get Copies • What is it? • Typical Balance Sheet • Current Assets • Receivables • Receivable Turns • Inventory • Inventory Turns • Inventory Example • Prepaid Expenses • Current Liabilities • Working Capital • WC Per Dollar of Sales • Negative Work. Cap • Current Ratio • Quick Ratio • Long Term Investment • Property, Plant, Equip. • Intangible Assets • Goodwill • Deferred Charges • Debt, Debt to Equity • Other Liabilities • Minority Interest • Shareholder Equity • Book Value • Com. & Pref. Shares • Cap. Surplus, Reserve • Treasury Stock • Retained Earnings • Formula & Calculations • Putting it all Together • Segment 2

Related Resources • Investing Lesson 1 • Investing Lesson 2 • Investing Lesson 3 • More Lessons

Current Assets

The first thing listed under the asset column on the balance sheet is something called "current assets".  This is where companies list all of the stuff that can be converted into cash in a short period of time [usually a year or less].  Because these assets are easily turned into cash, they are sometimes referred to as "liquid".  They normally consist of:

Cash and Cash Equivalents

Cash and Cash Equivalents is the amount of money the company has in bank accounts, savings bonds, certificates of deposit, and money market funds.  It tells you how much money is available to the business immediately.  How much should a company keep on the balance sheet?  Generally speaking, the more cash on hand the better.  Not only does a decent cash hoard give management the ability to pay dividends and repurchase shares, but it can provide extra wiggle-room when times get bad.

There are some cases where cash on the balance sheet isn't necessarily a good thing.  If a company is not able to generate enough profits internally, they may turn to a bank and borrow money.  The money sitting on the balance sheet as cash may actually be borrowed money.  To find out, you are going to have to look at the amount of debt a company has (we will be discussing this later on in the lesson).  The moral: You probably won't be able to tell if a company is weak based on cash alone; the amount of debt is far more important.

Short Term Investments

These are investments that the company plans to sell shortly or can be sold to provide cash.  Short term investments aren't as readily available as money in a checking account, but they provide added cushion if some immediate need were to arise.  Short Term Investments become important when a company has so much cash sitting around that it has no qualms about tying some of it up in slightly longer-term investment vehicles (such as bonds which have maturities of less than one year).  This allows the business to earn a slightly higher interest rate than if they stuck the cash in a corporate savings account. 

Perhaps the most legendary cash hoard in the business world right now is Microsoft's - the company has $5.25 billion in cash and $32.973 billion in short term investments.

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