Why are office supplies considered current assets, and why is it important to understand their details when analyzing financial statements?

Investors who want to monitor a company’s financial health need to thoroughly understand financial statements, especially the assets section that shows the company’s ability to withstand crises. In this article, we will clarify the concept of rapidly changing assets and how to analyze them accurately to support investment decisions.

Apple holds $48 billion in cash, but receivables have increased by 62.7% - What does this signal?

Apple is considered a financially strong company. In 2019, the company had total liquid assets convertible to cash within the year of $162.8 billion, along with cash and near-cash assets of approximately $59 billion. Comparing the balance sheets of 2019 and 2020 reveals interesting results.

Cash figures (Cash & Cash Equivalents) decreased by more than half, from $90 billion to $48 billion. Meanwhile, trade receivables increased by over 62%, from $37 billion to $60 billion. This indicates that the company may have adopted a new cash management approach or perhaps is experiencing slower collections from customers.

What exactly are current assets, and how do they differ from other assets?

(Current Asset) refers to the section on the balance sheet representing the value of assets that the company can convert back into cash within 12 months. This figure helps investors assess the company’s short-term liquidity and whether it can survive a crisis.

The distinction between two types of assets:

Current Assets - Can be converted into cash in the short term (not exceeding one year), providing high liquidity, such as cash, bank deposits, notes receivable, trade receivables, inventory, office supplies, and accrued income.

Non-current Assets - Difficult to convert into cash and held for more than one year. They cannot assist in crisis recovery quickly, such as land, buildings, machinery, and long-term investments.

What are the components of current assets, and what types are there?

###Cash - The most liquid asset

Cash is the asset that can be transferred most quickly, used to settle debts immediately, and serves as a medium of exchange accepted by everyone. However, holding too much cash does not generate returns, so it is not a good policy for a company.

###Bank Deposits - Balance between liquidity and returns

Bank deposits are similar to cash, can be converted back quickly, and earn interest. However, they carry risks related to the financial stability of the bank.

###Short-term Investments - Fields for potential returns

Companies may invest in various short-term securities to make their cash work, such as stocks, bonds, or gold. These carry higher risks but offer opportunities for profit.

###Notes Receivable - Shorter-than-one-year contracts

Loans or trade agreements with various maturity periods, with risks of default, but can generate income from interest.

###Trade Receivables - Credit sales records

Money owed by customers, necessary for trade balance, but risky of loss if customers default during a crisis.

###Inventory - Goods awaiting sale

Raw materials or finished goods waiting to be sold, convertible into cash through sales. Investors should be cautious whether inventory levels are normal or if they are “stale” stock that has become a sunk cost.

###Office Supplies - Consumables

Office supplies are considered current assets because they are used up in the short term, such as paper, pens, and other office materials with less than a year’s useful life.

###Unearned Revenue and Prepaid Expenses - Future guarantees

Revenue not yet received but likely to be earned in the future, or expenses paid in advance to gain benefits later.

What does the data on current assets in the balance sheet tell investors?

Current assets on the balance sheet are a key indicator of a company’s “survivability” in the short term. In unexpected events, such as the COVID-19 crisis where a company temporarily cannot collect revenue, it still needs to pay employees, rent, and maintenance costs. A higher level of current assets acts as a lifeline during such times.

The quality of these assets is as important as their quantity. For example, cash or bank deposits can definitely be converted into cash, but trade receivables during a crisis may not be collectible. Large inventories might become a burden rather than an asset.

Therefore, smart investors do not just look at the total current assets figure but also analyze how they are categorized and their quality. Which components are truly cash? Which are risky receivables? Which are inventory stockpiles?

Summary of key points investors should understand

Properly reading and interpreting current assets is a fundamental skill for investors analyzing a company’s financial quality. The current assets figure on the balance sheet provides an overall picture of short-term liquidity, but the crucial part is to look deeper.

Office supplies, receivables, and inventories are not of equal quality. Some properties can definitely be converted into cash, while others carry risks. The sudden events like COVID-19 have proven that companies with large, high-quality current assets are more likely to survive.

Therefore, when making investment decisions, examining the details of current assets is an essential step that should not be overlooked.