CFA Level I Exam · Analyzing Balance Sheets

Current Assets, Inventories and Receivables for CFA Level I

Updated 7 October 2026 · Fact-checked

Current assets are cash, receivables, inventories and prepaid items expected to turn into cash within a year or the operating cycle. Receivables are shown net of an allowance for doubtful accounts. Inventories are shown at the lower of cost and net realisable value under IFRS. Work out each carrying amount, then test it.

Understand Current Assets, Inventories and Receivables

Current assets are the resources a company expects to convert to cash, sell or use up within one year or its operating cycle, whichever is longer. They are listed roughly in order of liquidity: cash and cash equivalents, marketable securities, trade receivables, inventories, and prepaid expenses. Analysts care because these items drive liquidity and working capital.

Cash equivalents are short-term, highly liquid investments with little risk of value change, usually with an original maturity of three months or less. Receivables are amounts customers owe. Revenue is booked when earned, but cash may not arrive, and some customers will not pay. So receivables are reported at the amount expected to be collected: gross receivables minus the allowance for doubtful accounts. Bad debt expense hits the income statement when the allowance is raised. A write-off of a specific account reduces both gross receivables and the allowance, so net receivables and earnings do not change at that moment.

Inventories are goods held for sale, goods in production and raw materials. Cost includes purchase price, conversion costs and other costs to bring the goods to their present location and condition. Storage costs (unless needed in production), abnormal waste and selling costs are expensed. Under IFRS, inventories are carried at the lower of cost and net realisable value (NRV). NRV is the estimated selling price less the estimated costs to complete and sell. If NRV falls below cost, you write the inventory down and record a loss. IFRS allows a reversal of a write-down if NRV recovers, up to the original cost. US GAAP differs: for inventory not on LIFO or the retail method, it uses lower of cost and NRV too, while LIFO and retail method inventory use lower of cost or market, and US GAAP does not allow reversals.

Prepaid expenses are payments made in advance, such as insurance or rent. They are assets until the benefit is used, then they become expenses. Analysts also watch trends: receivables growing faster than sales, a falling allowance as a percentage of gross receivables, or inventory growing faster than sales can signal aggressive revenue recognition or weak demand.

Key formulas to remember

Net receivables: Net receivables = Gross receivables − Allowance for doubtful accounts; This is the balance sheet carrying amount.
Ending allowance: Ending allowance = Beginning allowance + Bad debt expense − Write-offs + Recoveries; Recoveries are written-off amounts later collected. Write-offs reduce the allowance but do not create expense.
Net realisable value: NRV = Estimated selling price − Estimated costs to complete and sell; Used for the IFRS inventory test.
Inventory carrying amount (IFRS): Carrying amount = Lower of cost and NRV; Write-down = Cost − NRV when NRV is lower. Reversals are allowed up to original cost.
Inventory roll-forward: Ending inventory = Beginning inventory + Purchases − Cost of goods sold; Rearrange to find purchases or COGS.
Receivables days: Days sales outstanding = Average receivables ÷ Revenue × 365; A rising figure may signal collection problems or aggressive revenue recognition.

How to solve Current Assets, Inventories and Receivables questions

Use the same sequence for any question on current asset measurement.

1Identify the asset: cash equivalent, receivable, inventory or prepaid item, and whether the question uses IFRS or US GAAP.
2For receivables, compute the gross balance, then apply the allowance to get net. Track the allowance roll-forward if write-offs or recoveries are given.
3For inventory, list cost and calculate NRV as selling price minus costs to complete and sell.
4Compare cost to NRV for each item or group, and take the lower. Write-down equals the difference.
5Decide the income statement effect: write-downs and bad debt expense reduce profit; write-offs against the allowance do not.
6Check reversal rules: IFRS permits reversal up to original cost, US GAAP does not.
7If asked for analysis, link to ratios such as receivables days, inventory days and the current ratio, and say which direction the change moves them.

Quickest way: Three-option elimination for current asset questions

When to use it: Use this when you have about 90 seconds and the options are close numerically.

Underline what the question asks: net amount, expense, or write-down.
Do one subtraction first: either gross − allowance, or cost − NRV.
Reject any option that uses selling price without deducting costs to sell, or that treats a write-off as an expense.
Since options run smallest to largest, check whether your answer sits at an end or in the middle, and recheck the sign if it does not match any option.

Common mistakes in Current Assets, Inventories and Receivables

Treating a write-off of a specific receivable as a new expense.
The word write-off sounds like a loss.
Fix: The expense was booked when the allowance was created. A write-off reduces gross receivables and the allowance by the same amount, so net receivables are unchanged.
Using selling price instead of NRV in the inventory test.
Students forget the costs to complete and sell.
Fix: Always subtract estimated costs to complete and sell from the selling price before comparing to cost.
Confusing lower of cost and NRV with lower of cost or market.
Older texts and US GAAP for LIFO and retail method use market, defined with a ceiling and floor.
Fix: Under IFRS the test is lower of cost and NRV. Lower of cost or market applies under US GAAP to LIFO and retail method inventory only.
Allowing a reversal of an inventory write-down under US GAAP.
IFRS allows reversals, and students mix the two.
Fix: IFRS reverses up to original cost. US GAAP treats the written-down amount as the new cost basis and does not reverse.
Counting inventory storage and selling costs in inventory cost.
Any cost related to inventory seems capitalisable.
Fix: Capitalise purchase and conversion costs and costs to bring goods to their location and condition. Expense abnormal waste, selling costs and most storage costs.
Ignoring the direction of the effect on ratios.
Students stop after computing the write-down.
Fix: A write-down lowers inventory, current assets, equity and profit, so the current ratio falls if it was above 1.

Worked examples

Example 1

A company has an opening allowance for doubtful accounts of $24,000. During the year bad debt expense is $18,000 and $15,000 of accounts are written off. No recoveries occur. Closing gross receivables are $792,000. What are net receivables at year end? A) $753,000 B) $759,000 C) $765,000

Show the solution

Closing allowance = 24,000 + 18,000 − 15,000 = 27,000.
Net receivables = closing gross receivables − closing allowance.
Net receivables = 792,000 − 27,000 = 765,000.

Answer: C) $765,000

Example 2

Under IFRS, a company holds inventory with a cost of €120,000. The estimated selling price is €135,000, estimated costs to complete are €10,000 and estimated selling costs are €8,000. What write-down is required? A) €0 B) €3,000 C) €18,000

Show the solution

NRV = 135,000 − 10,000 − 8,000 = 117,000.
Compare cost 120,000 with NRV 117,000. NRV is lower.
Write-down = 120,000 − 117,000 = 3,000.
The carrying amount becomes €117,000 and a €3,000 loss is recognised.

Answer: B) €3,000

Exam tips

Always compute NRV with both costs to complete and costs to sell removed. Option C style traps use the selling price alone.
Read whether the question says IFRS or US GAAP. Reversal rules are a favourite test point.
For allowance questions, draw the roll-forward in one line. Expense adds, write-offs subtract.
Remember that a write-off leaves net receivables unchanged, and expect a conceptual question on this.
For analysis items, link a faster rise in receivables or inventory than sales to possible revenue or demand concerns.

Practice questions from Analyzing Balance Sheets

Current Assets, Inventories and Receivables in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Current Assets, Inventories and Receivables: frequently asked questions

What is the difference between lower of cost and NRV and lower of cost or market?

Lower of cost and NRV compares cost with selling price less costs to complete and sell. Lower of cost or market uses replacement cost bounded by a ceiling (NRV) and a floor (NRV less normal profit margin). Under US GAAP it applies to LIFO and retail method inventory, while IFRS uses NRV.

Does writing off a receivable reduce profit?

No. The expense was recognised when the allowance was increased. The write-off removes the account and an equal part of the allowance, so net receivables and profit are unchanged at that point.

Can inventory write-downs be reversed?

Under IFRS a write-down can be reversed if NRV recovers, but only up to the original cost. US GAAP does not permit reversal because the written-down value becomes the new cost.

How should I analyse current assets in financial statement analysis?

Compare growth in receivables and inventory with sales growth, track the allowance as a percentage of gross receivables, and look at days ratios and the current ratio. Unusual changes may signal weak collections, obsolete stock or aggressive accounting.