Both U.S. GAAP and IFRS require the classification of assets and liabilities based on liquidity. Under U.S. GAAP, current is defined as the firms operating cycle or one year, whichever is longer. The operating cycle is the time required to go from materials acquisition to cash collection from revenue, typically calculated as inventory days on hand plus accounts receivable days to be collected.

The working capital concept attempts to provide useful information by giving an indication of an entitys liquidity and the degree of protection given to short-term creditors. As a result, it measures the critical cash flow capacity of the entity and the cash buffer available to meet current obligations.

Group discussion questions:

a. Discuss whether all types of current asset actually affect current cash flows and liquidity. Identify one type of current asset that does not affect current cash flows.

b. If certain types of current asset do not affect short-term cash flows, should they be classified as part of working capital, when measuring liquidity? Should these assets be outlawed from being classified as current on the balance sheet?

c. Would it more appropriate to classify short-term assets according to whether they are held for: exchange (sale), held for use, and those representing deferred charges?

d. Discuss whether all types of current liability actually affect current cash flows and liquidity. Identify a type of current liability that does not affect current cash flows.

e. If certain types of current liability do not reduce short-term cash flows, should they be classified as part of working capital, when measuring liquidity? Should these assets be outlawed from being classified as current on the balance sheet?