Assets under balance sheet
-current assets are expected to be sold or converted to cash within a year or one operational cycle
(operational cycle is the initial investment an entity makes in goods & services to when cash is received
-Non-current assets are the opposite –not expected to be sold or converted to cash within a year/1
operational cycle. Ie: company equipment are expected to sit in a retail store as a economic resource to
provide the store a service for a number of years (staying within a year would constitute the asset as being
a non-current asset)
-if under assets in a balance sheet, there is no “current assets” then its assumed that all the assets listed are
GAAP rules state that in order for it to be an asset:
-asset must be the result of a transaction with another entity
-cost of an asset can be determined (GAAP requires that an asset be valued at the COST PAID for)
-asset must provide a future benefit to the entityAND the benefit must be REASONABLY
ie, we would generally classify advertisements as an asset from our intuition. However, according to
GAAP, its difficult to measure its future benefit as there is uncertainty and hard to measure
UNDER FINANCIAL STATEMENTS, GAPP REQUIRESASSETS TO BE RECORDEDAT COST,
NOT THEASSET’S MARKET VALUE.
Liabilities under the balance sheet
-entity’s obligation to pay money or provide services to suppliers, lenders, and customers
We can have several types of liabilities:
A) A/P and accrued liabilities
B) Income tax payables
C) Current portion of long-term debt
D) Long-term debt
A/P and accrued liabilities are AMOUNTS OWED to suppliers for goods and services that x company
purchased on CREDIT
-the manufacturer has given x company time to pay its bills
Income tax payables are money owed to the government for income taxes
Current portion of long-term debt are MONEY BORROWED for more THAN ONE YEAR that is due to
be repaid within the next year
Long term debt are money borrowed that has to be REPAID in more than one year Just like assets, liabilities can be classified into CURRENT and NON-CURRENT liabilities.
CURRENT liabilities- when obligations or debt will be paid within ONE year or operational cycle
NON-CURRENT liabilities- when obligations or debt will be paid in MORE than ONE year or
Rmb, if no liability is classified as a current liability it is assumed to be non-current liabilities.
*What’s the point in classifying assets and liabilities under current or non-current?
Its important to many users of financial statements because they want to assess an entity’s liquidity.
“Liquidity is an entity’s ability to pay its obligations as they come due; it refers to the availability of cash
or near-cash resources to meet obligations”
-important to CREDITORS as they would like to know if the company is able to pay back or to other
creditors who are looking to extend credit .As well SHAREHOLDERS may be interested to see if
company be in financial trouble due to the possibility of them going out of business.
Current assets = resources that are or will soon be available to meet obligations that are coming due
Current liabilities =obligations that must be fulfilled
Current assets and liabilities give important information about a company’s liquidity
Current assets – current liabilities = working capital
Working capital suggests