Contractor License Practice Exam

Which of the following are examples of current assets?

1. Inventory, Accounts Payable, Notes Receivable

2. Cash, Accounts Receivable, Prepaid Expenses

3. Buildings, Equipment, Land

4. Retained Earnings, Long-term Investments, Payables

The correct answer is: Cash, Accounts Receivable, Prepaid Expenses

The correct answer identifies current assets as items that are expected to be converted into cash or used up within one year or the operating cycle, whichever is longer. Current assets are crucial for assessing a company's liquidity and short-term financial health. Cash is the most liquid asset a business can hold, making it foundational to current assets. Accounts receivable represents money owed to the business by customers for goods or services that have been delivered but not yet paid for, which is also expected to be collected within a short time frame. Prepaid expenses are payments made in advance for services or goods to be received in the future; although they are considered expenses, they qualify as current assets because they will be utilized within a year, reflecting an expected economic benefit. In contrast, inventory is also a current asset, but accounts payable is a liability, which is why the first choice does not qualify as accurate. Buildings, equipment, and land, listed in another option, are classified as long-term assets, or fixed assets, reflecting investments in property that will be used for an extended term rather than converted to cash quickly. Retained earnings and long-term investments generally belong to equity and investments categories, respectively, further supporting that not all items listed in the remaining options can be classified as