Utah Contractor Practice Exam

Current assets primarily include cash and which of the following?

1. Equipment

2. Prepaid expenses

3. Security deposits

4. All of the above

The correct answer is: All of the above

Current assets are defined as assets that are expected to be converted into cash or used up within one year or within one operating cycle, whichever is longer. Cash itself is the most liquid asset, and it forms the foundation of current assets. Prepaid expenses are considered current assets because they represent payments made for services or goods to be received in the future. For instance, if a contractor pays for insurance coverage in advance, that amount is recorded as a prepaid expense until the coverage period occurs. Security deposits can also be classified as current assets if they are expected to be returned within one year. For example, a deposit made for renting office space that is refunded at the end of the lease term qualifies as a current asset. Equipment, on the other hand, is typically not classified as a current asset because it usually has a useful life greater than one year and is therefore categorized as a long-term asset. Thus, the correct understanding of what constitutes current assets confirms that prepaid expenses and security deposits are indeed included in that classification, while equipment would not be. Therefore, the comprehensive recognition of cash along with prepaid expenses and security deposits validates the choice of all of the above as correct.