Question

This discussion thread test the Learning Objective of 3-2 Identify and describe the various balance sheet asset classifications and 3-3 Identify and describe the various liability and shareholders' equity classifications.

The usefulness of the balance sheet is enhanced when assets and liabilities are grouped according to common characteristics.  The broad distinction made in the balance sheet is the current versus long-term classification of both assets and liabilities.

Required:

1. Discuss the factors that determine whether an asset or liability should be classified as current or long-term in a balance sheet.

2. Identify six items that under different circumstances could be classified as either current of long-term. Indicate the factors that would determent the correct classification.

Answer 1

1. We can classify the assets and liabilities as either short term or long term on the basis of time. Short term assets and short term liabilities will be for 1year and assets and liabilities for more than one year are know as long term assets and long term liabilities. Current assets can be used immediately to pay for liabilities and expenses whereas long term assets will be used until few years. Current liabilities should be paid immediately in the current year and long term liabilities can be settled in future or in installment basis.
2. Long term assets

• Land and building
• Furniture and fixtures
• Plant and machinery
• Patents

Short term assets

• Cash
• Inventory
• Bills receivable
• Prepaid asset

Long term liabilities

• Loan
• Advance
• Non current investment

Short term liabilities

• Outstanding liability
• Current investment