Question

Current assets are expected to be used up or converted to cash within one year or an operating period.

Why does the classification of current versus non-current assets matter? Give concrete examples of current and non-current assets in your response. Specifically mention where this may or may not be helpful to (a) management, (b) a leading institution, (c) potential investors/ stockholders.

Answer 1

classification of assets into current and non current asset is done on the basis of life of assets. assets which are converted into cash with in a year is called current and rest are called non current assets. classification of assets and non current assets is important to know the short term solvency of the company. this classification helps to know that how much current assets are available to pay off the short term liabilities. example of short term assets are cash, marketable securities, accounts receivables, debtors and inventory. on the other hand non current assets comprises of plant and equipment, land, building etc.

Classification of assets is important for management to know what is the present short term solvency position and how much additional funds would be needed for working capital requirement. it helps in working capital planning. and sources required to fulfill long term funds requirement.

Leading institutions can use this information to know the short term and long term solvency of the borrower to know the financial strength and weakness.

Investors can use this information for investment decision making and to know the formation of capital structure that whether it is levered firm or equity owned fund