Question

What is the difference between a current asset and property, plant, and equipment? How does separating these assets in a classified balance sheet help people understand the financial position of a corporation?

Answer 1

Current assets are the assets which are held for less than a year. Most of the Current assets are generated out of operating business. For example: Accounts receivable, Inventory, and Prepaid expense. There are few current assets which are classified as current due to its nature for example: Short term investments, marketable securities, etc. Current assets are not subject to annual depreciation but are valued based on accounting principles. For example Accounts receivable is valued at net realisable value; Inventory is valued at lower of cost or market price, etc

Property, Plant and equipment are the long term assets of the firm which are fixed in nature. They are the core assets of the firm which are deployed in business to generate revenue. They are held beyond a year and for a longer period of time. PPE are depreciated based on useful life of the asset.

Separating Current assets and Property, Plant and equipment in a classified balance sheet helps end users in understanding financial position in below ways:

· They help in understanding working capital requirements since current assets are part of working capital.

· They help in calculating ratios to understand them better. for example: Current ratio, Quick ratio, Fixed assets turnover ratio, etc

· Current assets indicate the liquidity of the firm that is how much current assets are available to meet short term obligations (current liabilities)

· Fixed assets classification helps in understanding the capital expenditure and depreciation expense during the year.