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Chapter 5: Q6Q (page 237)

What is meant by liquidity? Rank the following assets from one to five in order of liquidity.

(a) Goodwill.

(b) Inventory.

(c) Buildings.

(d) Short-term investments.

(e) Accounts receivable.

Short Answer

Expert verified

Liquidity can be defined as the easiness of converting assets into cash. The ranking of assets is made based on thetime required to convert them into cash.

Step by step solution

01

What is Liquidity

The efficiency of the business entity to generate cash as early as possible by selling its current assets is known as liquidity. Financial analysts use ratio analysis to determine the liquidity of the company.

02

Order of Liquidity

  1. Short-term investment.
  2. Accounts receivable.
  3. Inventory.
  4. Building.
  5. Goodwill.

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Most popular questions from this chapter

The net income for the year for Genesis, Inc. is \(750,000, but the statement of cash flows reports that the net cash provided by operating activities is \)640,000. What might account for the difference?

A recent financial magazine indicated that the airline industry has poor financial flexibility. What is meant by financial flexibility, and why is it important?

(Classification of Balance Sheet Accounts) Assume that Fielder Enterprises uses the following headings on its balance sheet.

(a) Current assets

(g) Long-term liabilities

(b) Investments

(h) Capital stock

(c) Property, plant, and equipment

(i) Equity attribute to non-controlling interest

(d) Intangible assets

(i) paid-in-capital in excess of par

(e) Other assets

(k) Retained earnings

(f) Current liabilities

Instructions

Indicate by letter how each of the following usually should be classified. If an item should appear in a note to the financial statements, use the letter 鈥淣鈥� to indicate this fact. If an item need not be reported at all on the balance sheet, use the letter 鈥淴.鈥�

1. Prepaid insurance.

2. Stock owned in affiliated companies.

3. Unearned service revenue.

4. Advances to suppliers.

5. Unearned rent revenue.

6. Preferred stock.

7. Additional paid-in capital on preferred stock.

8. Copyrights.

9. Petty cash fund.

10. Sales taxes payable.

11. Accrued interest on notes receivable.

12. Twenty-year issue of bonds payable that will mature within the next year. (No sinking fund exists, and refunding is not planned.)

13. Machinery retired from use and held for sale.

14. Fully depreciated machine still in use.

15. Accrued interest on bonds payable.

16. Salaries that company budget shows will be paid to employees within the next year.

17. Discount on bonds payable. (Assume related to bonds payable in item 12.)

18. Accumulated depreciation鈥攂uildings.

19. Shares held by non-controlling stockholders.

Net income for the year for Carrie, Inc. was \(750,000, but the statement of cash flows reports that net cash provided by operating activities was \)860,000. What might account for the difference?

EXCEL (Current Assets Section of the Balance Sheet) Presented below are selected accounts of Yasunari Kawabata Company at December 31, 2017.

Inventory

\(52,000

Cost of goods sold

2,100,000

Unearned service revenue

90,000

Note receivable

40,000

Equipment

253,000

Account receivable

161,000

Inventory (Work-in-process)

34,000

Inventory (raw material)

207,000

Cash

37,000

Supplies Expenses

60,000

Debt investment (Short-term)

31,000

Allowance for doubtful accounts

12,000

Customer advances

36,000

License

18,000

Restricted cash for plant expansion

50,000

Additional paid-in-capital

88,000

Treasury stock

22,000

The following additional information is available.

1. Inventories are valued at lower-of-cost or market using LIFO.

2. Equipment is recorded at cost. Accumulated depreciation, computed on a straight-line basis, is \)50,600.

3. The short-term investments have a fair value of \(29,000. (Assume they are trading securities.)

4. The notes receivable are due April 30, 2019, with interest receivable every April 30. The notes bear interest at 6%. (Hint: Accrue interest due on December 31, 2017.)

5. The allowance for doubtful accounts applies to the accounts receivable. Accounts receivable of \)50,000 are pledged as collateral on a bank loan.

6. Licenses are recorded net of accumulated amortisation of $14,000.

7. Treasury stock is recorded at cost.

Instructions

Prepare the current assets section of Yasunari Kawabata Company鈥檚 December 31, 2017, balance sheet, with appropriate disclosures.
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