Chapter 2
2.1 The Classified Balance Sheet
- To improve users’ understanding of a company’s financial position, companies often
prepare what is referred to as a classified balance sheet instead
* Classified balance sheet = groups together similar assets and similar liabilities, using a
number of standard classifications and sections
- This is useful because items within a group have similar economic characteristics
Standard balance sheet classifications:
• Assets
− Current assets
− Long-term investments
− Property, plant, and equipment
− Intangible assets
• Liabilities and Stockholders’ Equity
− Current liabilities
− Long-term liabilities
− Stockholders' equity
--> These grouping help financial statement readers determine such things as:
1. Whether the company has enough assets to pay its debts as they come due
2. The claims of short and long term creditors on the company’s total assets
Current Assets
• Current Assets = assets that companies expect to convert to cash or use up within
one year or the operating cycle, whichever is longer
o *For most businesses, the cutoff for classification as current assets is one
year from the balance sheet date
▪ Some companies use a period longer then one year to classify assets
and liabilities as current because they have an operating cycle longer
than one year
o Ex: accounts receivable are current assets because the company will collect
them and convert them to cash within one year
, • Operating cycle = the average time required to go from cash to cash in producing
revenue—to purchase inventory, sell it on account, and then collect cash from
customers
o *for most businesses, this cycle takes less than a year, so they use one-year
cutoffs
o *For some businesses, such as vineyards or airplane manufacturers, this
period may be longer than a year
Companies list current assets in order of liquidity. **
- Common types of current assets, listed in order of liquidity are:
o Cash
o Investments (such as a short-term U.S. gov securities)
o Receivables (accounts receivable, notes receivable, and interest receivable)
o Inventories
o Prepaid expenses (insurance and supplies)
**a company’s assets are important in assessing its short-term debt-paying ability
Long-Term Investments
• Long-term investments generally include the following:
o Investments in stocks and bonds of other corporations that are held for more
than one year
o Long-term assets such as land or buildings that a company is not currently
using in its operating activities
o Long-term notes receivable
**Long-term investments are often referred to simply as investments
Property, Plant, and Equipment
Property, plant, and equipment = assets with relatively long useful lives that are currently
used in operating the business
- *sometimes called fixed assets or plant assets
- includes land, buildings, equipment, delivery vehicles, and furniture
2.1 The Classified Balance Sheet
- To improve users’ understanding of a company’s financial position, companies often
prepare what is referred to as a classified balance sheet instead
* Classified balance sheet = groups together similar assets and similar liabilities, using a
number of standard classifications and sections
- This is useful because items within a group have similar economic characteristics
Standard balance sheet classifications:
• Assets
− Current assets
− Long-term investments
− Property, plant, and equipment
− Intangible assets
• Liabilities and Stockholders’ Equity
− Current liabilities
− Long-term liabilities
− Stockholders' equity
--> These grouping help financial statement readers determine such things as:
1. Whether the company has enough assets to pay its debts as they come due
2. The claims of short and long term creditors on the company’s total assets
Current Assets
• Current Assets = assets that companies expect to convert to cash or use up within
one year or the operating cycle, whichever is longer
o *For most businesses, the cutoff for classification as current assets is one
year from the balance sheet date
▪ Some companies use a period longer then one year to classify assets
and liabilities as current because they have an operating cycle longer
than one year
o Ex: accounts receivable are current assets because the company will collect
them and convert them to cash within one year
, • Operating cycle = the average time required to go from cash to cash in producing
revenue—to purchase inventory, sell it on account, and then collect cash from
customers
o *for most businesses, this cycle takes less than a year, so they use one-year
cutoffs
o *For some businesses, such as vineyards or airplane manufacturers, this
period may be longer than a year
Companies list current assets in order of liquidity. **
- Common types of current assets, listed in order of liquidity are:
o Cash
o Investments (such as a short-term U.S. gov securities)
o Receivables (accounts receivable, notes receivable, and interest receivable)
o Inventories
o Prepaid expenses (insurance and supplies)
**a company’s assets are important in assessing its short-term debt-paying ability
Long-Term Investments
• Long-term investments generally include the following:
o Investments in stocks and bonds of other corporations that are held for more
than one year
o Long-term assets such as land or buildings that a company is not currently
using in its operating activities
o Long-term notes receivable
**Long-term investments are often referred to simply as investments
Property, Plant, and Equipment
Property, plant, and equipment = assets with relatively long useful lives that are currently
used in operating the business
- *sometimes called fixed assets or plant assets
- includes land, buildings, equipment, delivery vehicles, and furniture
