The next current asset would be accounts receivable. We need to determine if the figure represented is net or gross. If net, then uncollectable dollars have been removed. Inventory is not liquid at all but rather a valuation that not only effects working capital but also profit and loss. In next weeks column we will discuss inventory, the methods of valuation and how it distorts working capital and gross and net profit.
Prepaid expenses are generally small, relative to the rest of the balance sheet.
They would include such items as prepaid insurance or rent. Prepaid expenses are grouped with current assets, through accounting convention, even though they will not generally generate any cash to use for paying current liabilities. Therefore, we should deduct prepaid expenses from the total of current assets and pretend they do not exist. Management's role in creating the balance sheet is to list all of their resources and create a positive working capital picture. Our role in financial analysis is to see as real a picture as possible of the firm's ability to meet it's obligations.