Question

Assets, liabilities, and equity are the three broad categories of information on a balance sheet. What is value to the user of the classifying the balance sheets further? Identify a potential user of a classified balance sheet and one significant item that user would analyze.

Answer 1

Hey buddy !!

Detailing is the key to lots of issues. Traditional balance sheet never classified the broader aspects further which hindered certain analyses that can be now made using a classified balance sheet.

A classified balance sheet is a financial statement that reports asset, liability, and equity accounts in meaningful subcategories for readers’ ease of use. In other words, it breaks down each of the balance sheet accounts into smaller categories to create a more useful and meaningful report.

There’s no standardized set of subcategories or required amount that must be used. Management can decide what types of classifications to use, but the most common tend to be current and long-term.This format is important because it gives end users more information about the company and its operations.

Potential user & analysis -

Creditors and investors can use these categories in their financial analysis of the business. For instance, they can use measurements like the current ratio to assess the company’s leverage and solvency by comparing the current assets and liabilities. This type of analysis wouldn’t be possible with a traditional balance sheet that isn’t classified into current and long-term categories.

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