"Does the Balance Sheet give a true picture of Current Assets ?" Comment.

Current assets as at a particular date may not be representative of the state of affairs prevailing on a day to day basis throughout the year. In the balance sheet we review that position of current assets as on a particular date only. In order to even out the effects of daily variation in the level of current assets, it is advisable to take average of weekly, monthly or quarterly holding depending upon the nature of the industry and turnover of the assets. The position at the end of a day is a static position which is not representative of the entire year. By taking period averages some amount of dynamism is brought into the picture. Sometimes, an industry might have seasonal peaks or troughs of working capital requirement. For example, agro based industry like fruit processing unit would need to stock more raw material during the peak season when the crop has been harvested than during the lean season. The high level of current assets can be nothing but a fiction when we seek to realize the current assets. It may happen that the inventory carried by the firm may consist of obsolete items, packing materials, finished goods which have been rejected by buyers and items like dies and tools which are more fixed than current in character. Prudence is required to get rid of current assets like obsolete items, packing material and finished goods which may have been rejected by buyers. On the other hand, the current liabilities are more ascertainable and less fictions. The payment of these liabilities, if not possible from the current assets, has to be arranged from long term sources of funds which may result in a mismatch that is not conducive to financial health of the firm.