Current Assets and Liabilities in Practice

Short-term assets represent a significant portion of a typical firm's overall assets.6 For U.S. manufacturing, mining, and trade corporations, current assets were about 50 percent of total assets in the 1960s. Today, this figure is closer to 40 percent. Most of the decline is due to more efficient cash and inventory management. Over this same period, current liabilities rose from about 20 percent of total liabilities and equity to almost 30 percent. The result is that liquidity (as measured by the ratio of net working capital to total assets) has declined, signaling a move to more restrictive short-term policies.

The cash cycle is longer in some industries than in others because of different products and industry practices. Table 19.2 illustrates this point by comparing the current asset and liability percentages for four different industries. Of the four, the aircraft and missiles industry has more than twice the investment in inventories. Does this mean that

6This discussion draws on Chapter 1 of N. C. Hill and W. L. Sartoris, Short-Term Financial Management, 2d ed. (New York: Macmillan, 1992).

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VII. Short-Term Financial Planning and Management

1S. Short-Term Finance and Planning

© The McGraw-Hill Companies, 2002

CHAPTER 19 Short-Term Finance and Planning

Current Assets and Current Liabilities as a Percentage of Total Assets for Selected

Industries: 1990

Printing and Publishing

Industrial Chemicals

Iron and Steel

Current assets Cash

Marketable securities Accounts receivable Inventory

Other current assets Total current assets

Current liabilities Notes payable Accounts payable Accruals and other current liabilities Total current liabilities

Managing Your Money At All Ages

Managing Your Money At All Ages

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