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Prepaid Expenses and Other Current Assets

Investing Lesson 3 - Analyzing a Balance Sheet

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Prepaid expenses

When a company pays its bills before they are due, a prepaid asset is created on the balance sheet under the current assets. That's because the company has the right to receive a good or service; this right is an asset because it has value.

In the course of every day operations, businesses will have to pay for goods or services before they actually receive the product. If a jewelry store moved into your neighborhood mall, it would most likely have to sign a rent agreement and pay six to twelve months' rent in advance. If the monthly rent was $1,000 and the business prepaid for an entire year, they would put $12,000 on the balance sheet under Prepaid Expenses ($1,000 monthly rent x 12 months = $12,000). Each month, they would deduct 1/12 from the prepaid expenses until the end of the year, at which point, the amount would be $0.

Sometimes companies decide to prepay taxes, salaries, utility bills, rent, or the interest on their debt. These would all be pooled together and put on the balance sheet under this heading.

By their very nature, Prepaid Expenses are a small part of the balance sheet. They are relatively unimportant in your analysis and shouldn't be given too much attention.

Notes Receivable

Notes Receivable are debts owed to the company which are payable within one year.

Other Current Assets

Other current assets are non-cash assets that are owed to the company within one year.

Non Standard Items

Sometimes companies put items on their balance sheet which aren't standard. If you find yourself analyzing a balance sheet and an oddball term shows up, search for it at investorwords or investopedia. If that still doesn't work, you can call your broker or a local banker, all of whom should be happy to give you an explanation of a term.

I would recommend you get a copy of Barron's "Dictionary of Finance and Investing Terms". They are relatively inexpensive ($10 or $11), and define over 4,000 terms. This can be a huge asset regardless of the financial statement you are looking at. You may also find the "Dictionary of Business Terms" useful as well. It has 7,500 entries covering almost every business definition you could possibly ask for. While neither is required to do balance sheet analysis, they can be a big help.

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This page is part of Investing Lesson 3 - Understanding the Balance Sheet. To go back to the beginning, see the Table of Contents. If you have already read this lesson, you can skip directly to the Balance Sheet Quiz.

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