Current assets and current liabilities

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.
⏱️TIMESTAMPS⏱️
0:00 Current assets and current liabilities on the balance sheet
0:53 Current vs non-current
1:03 Current assets definition and examples
1:26 Current liabilities definition and examples
2:00 Current assets vs current liabilities example: Amazon
4:01 Negative working capital
4:36 Current assets vs current liabilities example: Apple
Philip de Vroe (The Finance Storyteller) aims to make strategy, #finance and leadership enjoyable and easier to understand. Learn the business and #accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: KZbin videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!

[@TheFinanceStoryteller]

Enjoyed this video? Then please subscribe to the channel, and let's dive deeper into the Current Ratio (with lots of examples of well-known companies!): kzbin.info/www/bejne/mpzMhIqFZ7SMntE

[@KnightCreator]

Thanks for this well explained topic, I have learned lots of new vocabulary and made it easy to understand for a new person in the stock market. I wish the video was longer and explained even more stuff to get more out of it, thank you.

[@TheFinanceStoryteller]

Thank you! Love hearing that. I think you will enjoy the related videos on current ratio kzbin.info/www/bejne/mpzMhIqFZ7SMntE and liquidity kzbin.info/www/bejne/jqXNhGp5m7qGqaM and my explanation of how a balance sheet works kzbin.info/www/bejne/m3rNdJSbg9JgjM0 Lots more explanation and examples on current asset and current liabilities, and related topics, in there! :-)

[@jamesperry3837]

_Great! Thanks for sharing and teaching._

[@TheFinanceStoryteller]

You're welcome, James! Good to hear from you!

[@matthew3496]

Great video, I'm sure I will be watching many more🍕

[@TheFinanceStoryteller]

Awesome! Thank you!

[@Chad-Tyrone-Pookey]

Very well done!!! Brava !

[@TheFinanceStoryteller]

Thank you, Ion! :-)

[@konstancyja82]

Exciting way to look on the companies 😃👍🏻

[@TheFinanceStoryteller]

Thank you, Anna!

[@muhammedasifkhurshid1156]

nice, thanks and regard

[@TheFinanceStoryteller]

You're welcome! Nice to hear from you, Muhammed. Thank you for watching and commenting.

[@vikashbarnwal4840]

Hi Appreciate your way teaching and understanding in easy way.

[@vikashbarnwal4840]

Hi Dear friend. I am very happy to watch your this new account video.

[@TheFinanceStoryteller]

Thank you very much, Vikash!!!

[@vikashbarnwal4840]

Hi

[@vikashbarnwal4840]

How r u friend..

[@TheFinanceStoryteller]

Excellent! Very ambitious target of making 100 videos in 2020. 2 done, 98 to go. ;-)

[@ahmadhiyyastudentchannel8232]

Thanks alot man.i can't really pay attention in class because it's soo boring and long.bit u tell me everything in 5 to 10min

[@TheFinanceStoryteller]

Happy to help, Izuku!!! Please subscribe to the channel, and share with your classmates!

[@amukelanimashele2528]

thanks for the video. now i understand.

[@TheFinanceStoryteller]

Great to hear that, Amukelani! Thank you for watching and commenting.

[@ntokozomlotshwa3890]

Thank you, I understand better now

[@TheFinanceStoryteller]

Happy to help! Take a look at my video on the current ratio that connects these two in a financial metric: kzbin.info/www/bejne/mpzMhIqFZ7SMntE

[@snapbackwill]

Absolutely loving these videos - thank you so much! Quick question - In the Apple example at the end of the video when calculating the sum to determine 'Working Capital'; is having a negative value [-$2bn] a postive or a negative? If it is a negative, could you help to explain how Apple might have -$2bn and yet be in a strong position? Is it because the capital has been deployed in the same way I could put a deposit on a house for £20,000, that would then be listed as -£20,000 on the Balance Sheet but in reality is a positive as it now allows me to control a house? Thanks again!

[@TheFinanceStoryteller]

Having a negative amount of working capital is a good thing! What you see in this video (Apple 2019 balance sheet) is that the "free loans from suppliers" (accounts payable) plus the prepayments from customers for services not yet delivered (deferred revenue), exceed the sum of the "free loans to customers" (accounts receivable) plus the inventory (which in case of Apple is really the sum of inventory plus vendor non-trade receivables). For more current numbers (Apple FY22 ending balance sheet) see this recent video: kzbin.info/www/bejne/gJCUd2t9pLGCf5o For a discussion of working capital and more examples of other companies, see this one: kzbin.info/www/bejne/jqercp-rnpJ1pNE And if you want to "zoom out" to the bigger picture, have a look at my discussion of the current ratio (current assets divided by current liabilities), where you will see there are two ways to interpret a low ratio and two ways to interpret a high ratio: kzbin.info/www/bejne/mpzMhIqFZ7SMntE

[@snapbackwill]

@@TheFinanceStoryteller Thank you so much! Please keep up the good work!

[@RoyRogersMcFreely710dollaSign]

Great video! Also for me, a non daily english speaking person , good understandable

[@TheFinanceStoryteller]

Glad to hear that!

[@timmypompom4810]

Hi, how come you left out accrued expenses when you were trying to get at the working capital? I thought working capital is equal to current assets minus current liabilities. Please let me know why, thanks. Great video!

[@TheFinanceStoryteller]

Thanks for the compliment, Timmy! Regarding your question on working capital: there is a big difference between the textbook world and the real business world. Working capital tends to get defined in textbooks as the current assets on a company’s balance sheet minus its current liabilities. There is a much more practical definition, used in everyday business life, that focuses on those items that are (in real life) often the largest in amount: accounts receivable, plus inventory, minus accounts payable. However, depending on the business model and operating realities of a company, some companies would include unearned revenue (aka deferred revenue) in their working capital definition. In vary rare occasions, companies include accrued expenses in working capital. See my series of videos on working capital and working capital management: kzbin.info/www/bejne/jqercp-rnpJ1pNE

[@princejag]

Interesting! Based on your analysis what you suggest on Apple to go for organic or Acquisition strategy?

[@TheFinanceStoryteller]

I trust that they will continue to mix organic growth with growth through acquisitions, continue to pay an ever increasing dividend to provide an attractive dividend yield to investors, and invest the remaining cash-related assets wisely. In a lot of cases, M&A activity is driven by "the right target, at the right time, for the right price".

[@smitkotadiya444]

can you please explain the "exciting bit" you described in video that how amazon suppliers and customers are financing more than amazon itself?

[@TheFinanceStoryteller]

Hello Smit! It is very unusual for a company to have a negative amount of working capital. For Amazon, the sum of the inventory and accounts receivable balance is lower than the sum of the accounts payable and unearned revenue balances. If you would calculate the return on net operating assets (excluding the cash and marketable securities balances from the denominator of this equation) for a company like Amazon, it would be very high. Amazon turns its assets into sales very quickly, it has a high "velocity". If you want to lean more about working capital management, please see this video: kzbin.info/www/bejne/mWbMmpqZetWjkNk

[@smitkotadiya444]

@@TheFinanceStoryteller thanx a lot for explanation.

[@princejag]

My friend could you make a video on how to stop recording the financial transactions "Going Concern" basis if the company is on verge of collapse. Show it in a practical way......

[@TheFinanceStoryteller]

Thanks for the suggestion! I have put "going concern" on my list of possible future video topics, will research whether there is enough to say about it for a full length video.

[@gloriouscoral6409]

What about long term debts and net income?

[@TheFinanceStoryteller]

Long term debts are in non-current liabilities. Net income is in the income statement, and gets added to equity at the end of the reporting period. See my video explaining the balance sheet: kzbin.info/www/bejne/m3rNdJSbg9JgjM0

[@luciusthorson1898]

HI GOLDEN FAITH ACADEMY (GFA) STUDENTS

[@TheFinanceStoryteller]

Welcome!