What is Prepaid SGA? question, difference, between, current

cmacedo

In Q-Bank question ID 97923, they list this as a part of Current Assets.

So theoretically, the difference between the current ratio and the quick ratio is the exclusion of inventory and Prepaid SGA (whatever that is)

homie

SGA is Selling, General and Administrative Expenses, reported in I/S as Operating Expenses.

Thus Prepaid SGAs would be Prepaid Expenses and would be recognized as an Asset. It would be Current Asset, if goods or services it paid for are going to be consumed in 1 yr or less.

But, though they may be Current Assets, they will NOT be included in ANY of the Liquidity Ratios (Current, Quick or Cash). The rationale is, unlike Inventory or Receivables, these assets will never be converted into cash.

This is my understanding.

Anyone with Accounting background, please verify.

draz

They are in fact, included in the Current Ratio as part of Current Assets. They may not be converted to cash but they are still essential in determining the short term liquidity of the firm. It helps the company to avoid meeting other short term liabilities when due since it has already been paid. Thus, the firm will have and should have a higher current ratio (better liquidity) due to this.

Finalnub

What rus1bus said. he is right on the money.

bapswarrior

In the questions I have come across in Qbank/Schweser, they have included the Prepaid Expenses in Current Ratio (but not the more defensive liquidity ratios).

I see your logic on excluding it, but have never actually seen it excluded (or any other Current Asset) in practice. Even dating back to undergrad, I have always seen Current Ratio = Current Assets / Current Liabilities with no mention of excluding any current assets.

ramzes

Oh no
I am sorry

Job71188 you are definitely right. Rus1bus was wrong when he says the following:

"But, though they may be Current Assets, they will NOT be included in ANY of the Liquidity Ratios (Current, Quick or Cash). The rationale is, unlike Inventory or Receivables, these assets will never be converted into cash"

These prepaid assets ARE included in current assets to calculate the current ratio.

They are EXCLUDED from quick assets (becuase they cant really be liquidated) to determine the quick ratio

Job71188 please confirm that you have read this post. You were right. I hope I dont end up changing your thinking. I misread your statment as rus1bus's. He is right (almost) all the time.

Micholien

When you told me I was wrong I did some research. Almost all sites told me to include it.

Besides, the chances of the test having a question that says "Compute the Current Ratio" where one choice has current ratio including Prepaid, and another choice excluding the Prepaid, is highly unlikely.



Edited 2 time(s). Last edit at Thursday, November 19, 2009 at 02:41PM by job71188.

MythosHF

Thank you revenant, job71188 and beatthecfa for correcting me.

Yes, it makes good sense for Prepaid Expenses to be included in Current Ratio. As they have lowered any associated current liabilities.