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Introduction to Accounting Preparing for a User’s Perspective How is a classified balance sheet prepared and how do the classifications help users? By Kevin C. Kimball, CPA with support from Debits and Credits Trainer www.canvas.net Free Jan. 2014 Available on the Google Play Store Classified Balance Sheet – Assets are classified based on their “liquidity” “liquidity” = nearness to cash Most liquid Current Assets Non-current Assets or Long-term Assets Convert to cash within one year Convert to cash after one year Least liquid < 1 year Possibly several years Classified Balance Sheet – Liabilities are classified based on how quickly cash will be needed to pay off the liabilities Payment due <= one year Current Liabilities To be paid within one year Liquid Non-current Liabilities or Long-term Liabilities To be paid after one year Solvent Payment due > one year Current assets = Short-term assets Non-current assets = Long-term assets Current liabilities = Short-term liabilities Non-current liabilities = Long-term liabilities Not very liquid $.11 of current asset per each $1 of current liability Very liquid $9 of current asset per each $1 of current liability Classified Balance Sheet – Assets are classified based on their “liquidity” “liquidity” = nearness to cash Most liquid Current Assets Non-current Assets or Long-term Assets Convert to cash within one year Convert to cash after one year Least liquid Inflows Outflows From asset conversions to pay off liabilities Classified balance sheets are classified based on liquidity Liquidity represents a company’s ability to make timely payments on its current liabilities In the US, the most liquid assets and the liabilities to be paid off soonest, are listed first (current <= 1 year) Classified balance sheets can be used to predict a company’s future cash flows, its liquidity and short-term credit worthiness Equity is classified by its source, either contributed or internally generated Introduction to Accounting Preparing for a User’s Perspective How is a classified balance sheet prepared and how do the classifications help users? By Kevin C. Kimball, CPA with support from Debits and Credits Trainer www.canvas.net Free Jan. 2014 Available on the Google Play Store
