Concept of Current Assets

Workingcapital The annual reports published by the company consists of the balance sheet and other connected returns. The balance sheet consists of liabilities and assets. The concept of current assets includes the following: Investment in shares and advances to other firms and public companies not connected with the business of the borrowing firm are excluded from current assets. The dead inventory i. e. slow moving or obsolete items should not be classified as current assets; The amount representing inter company transactions has to be treated as current only after examining the nature of the transactions and the merits of the case.

For example, the advance paid to the suppliers for a period more than the normal trade practice, in spite of any other considerations such as regular and assured supply should not be considered as current. Receivables arise out of sales other than deferred receivable (including the bills purchased and discounted by the bankers) The export receivables may be included in total current assets for arriving at the maximum permissible bank finance, but the minimum stipulated net working capital (i. e.

25 percent of total current assets under the second method lending) may be reckoned after excluding the quantum of export receivables from the total current assets; Similarly, the receivables arising out of domestic/inland sales, by drawing bills of exchange even with recourse, negotiated under usance letters of credit (whether revocable or irrevocable) is to be excluded for building up of current assets, for the limited purpose of reckoning the minimum prescribed net working capital required to be maintained under the second method of lending.

Other consumable spares: The projected levels of spares on the basis of past experience, but not exceeding twelve months’ consumption of imported items and nine months consumption of indigenous items may be treated as current assets, for the purpose of assessment of working capital requirements; All short term/temporary investments in money market instruments like commercial paper, certificate of deposits can be considered as current assets.

However, other investments like inter corporate deposits, investments in listed shares and debentures including investment in subsidiaries and associates are to be considered as non current assets. The Cash margin for non fund based limits like letter of credits/guarantees may be treated as part of current assets for the purpose of maximum permissible bank finance and current ratio. However, such margin held for deferred payment guarantee should be considered as non current assets. Reference link: http://classof1. com/homework-help/accounting-homework-help

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