What does the term ‘current assets’ include?

The term ‘current assets’ refers to assets that are expected to be converted into cash or consumed within one year or during the operating cycle of a business, whichever is longer. Cash and accounts receivable fit this definition perfectly, as cash is the most liquid asset and accounts receivable represents amounts owed to the business that are likely to be collected in the near term. This makes both cash and accounts receivable integral components of current assets, as they are readily available for use in day-to-day operations.

In contrast, real estate, inventory and equipment, and long-term investments do not consistently meet the criteria for current assets. Real estate typically represents long-term investments or fixed assets, inventory is considered a current asset but does not encompass the idea of quickly liquidated assets; equipment is classified as a long-term asset because it is used over an extended period. Long-term investments, as the name implies, are assets that a company does not expect to convert to cash within the short term, thus they fall outside the definition of current assets.