Utah Contractor Practice Exam

Which of the following is an example of a current asset?

1. Long-term debt

2. Inventory

3. Retained earnings

4. Investment properties

The correct answer is: Inventory

A current asset refers to any asset that a company expects to convert into cash or use up within one year or within its normal operating cycle, whichever is longer. Inventory fits this definition perfectly, as it represents goods that a company holds for the purpose of resale or usage in production. Being a key component of a company’s working capital, inventory is replenished and sold on a regular basis, thus making it a vital indicator of liquidity. Long-term debt does not qualify as a current asset because it represents obligations that a company is required to pay back over a period longer than one year. Retained earnings also do not fit into the category of current assets; rather, they are part of shareholders' equity reflecting the accumulated profit that has been reinvested in the business rather than distributed as dividends. Investment properties, while potentially valuable, are considered long-term assets as they are typically held to generate revenue over an extended period of time, not intended for conversion into cash within the near term. Recognizing inventory as a current asset is fundamental for understanding a company’s liquidity and operational efficiency, as it relates to how well a company can meet its short-term obligations using its most liquid resources.