/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Problem 12 The correct order of presentatio... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 4: Problem 12

The correct order of presentation in a classified balance sheet for the following current assets is: a. accounts receivable, cash, prepaid insurance, inventory. b. cash, inventory, accounts receivable, prepaid insurance. c. cash, accounts receivable, inventory, prepaid insurance. d. inventory, cash, accounts receivable, prepaid insurance.

Short Answer

Expert verified
c. cash, accounts receivable, inventory, prepaid insurance.

Step by step solution

01

Understand the Classification

In a classified balance sheet, current assets are listed based on their liquidity, meaning how quickly they can be converted into cash. The typical order follows liquidity from the most liquid to the least liquid.
02

Recognize the Liquidity Order

The liquidity order for current assets usually is: cash, accounts receivable, inventory, and prepaid insurance. Cash is the most liquid asset, followed by accounts receivable (cash expected soon), then inventory (which needs to be sold to become cash), and finally prepaid expenses (which are already paid and not readily convertible into cash).
03

Identify the Correct Option

Based on the typical liquidity order (cash, accounts receivable, inventory, prepaid insurance), compare the options given: - option a: accounts receivable, cash, prepaid insurance, inventory - option b: cash, inventory, accounts receivable, prepaid insurance - option c: cash, accounts receivable, inventory, prepaid insurance - option d: inventory, cash, accounts receivable, prepaid insurance. The correct order is option c.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Understanding Current Assets
In a classified balance sheet, current assets play a crucial role as they are essential for the day-to-day operations of a business. Current assets are short-term assets that a company expects to convert into cash or use within one business cycle, usually one year. They are typically used to cover the company's operational expenses and obligations.
  • Cash: The most liquid of all current assets, readily available for immediate use.
  • Accounts Receivable: Amounts owed by customers for goods or services provided, expected to be received in cash soon.
  • Inventory: Goods available for sale. It requires time to convert into cash through sales.
  • Prepaid Insurance: Advance payments for insurance services, considered less liquid as it's a prepaid expense.
Understanding the order of these assets based on liquidity is essential for preparing an accurate classified balance sheet.
The Importance of Liquidity
Liquidity refers to how quickly and easily an asset can be converted into cash without significant loss of value. It is a key factor in the classification of current assets. The more liquid an asset, the higher its position in the list of current assets on the balance sheet.
For a business, maintaining liquidity is important for several reasons:
  • Operational Efficiency: Liquidity allows a business to meet its short-term obligations, like paying suppliers or making payroll, which ensures smooth operations.
  • Financial Flexibility: High liquidity provides the flexibility to capitalize on sudden opportunities or manage unforeseen financial challenges.
  • Creditworthiness: Potential creditors often assess liquidity ratios to determine a company's ability to repay loans.
This is why the liquidity order鈥攃ash, accounts receivable, inventory, prepaid insurance鈥攎atters in the presentation of a balance sheet.
Accounting Principles in Balance Sheets
Accounting principles are the rules and guidelines that companies follow when reporting financial data. These principles ensure consistency, reliability, and comparability of financial statements. Key among these is the guideline for preparing a balance sheet, which is part of Generally Accepted Accounting Principles (GAAP).
A classified balance sheet organizes assets and liabilities into categories, enhancing clarity and insight into a company鈥檚 financial health. For current assets, this classification is done according to liquidity:
  • Consistency: Companies must consistently apply classifications in each reporting period. This enhances reliability.
  • Materiality: Only items that have a significant impact on financial statements are reported separately in the balance sheet.
  • Objectivity: Each item in the balance sheet should be based on objective data, supporting an accurate financial representation.
Following these principles not only fulfills regulatory requirements but also aids stakeholders in making informed financial decisions.

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Which of the following statements is incorrect concerning the worksheet? a. The worksheet is essentially a working tool of the accountant. b. The worksheet is distributed to management and other interested parties. c. The worksheet cannot be used as a basis for posting to ledger accounts. d. Financial statements can be prepared directly from the worksheet before journalizing and posting the adjusting entries.

in a classified balance sheet, assets are usually classified using the following categories: a. current assets; long-term assets; property, plant, and equipment; and intangible assets. b. current assets; long-term investments; property, plant, and equipment; and tangible assets. c. current assets; long-term investments; tangible assets; and intangible assets. d. current assets; long-term investments; property, plant, and equipment; and intangible assets.

When a net loss has occurred, Income Summary is: a. debited and Owner's Capital is credited. b. credited and Owner's Capital is debited. c. debited and Owner's Drawings is credited. d. credited and Owner's Drawings is debited.

In the unadjusted trial balance of its worksheet for the year ended December 31,2012, Taitum Company reported Equipment of \(\$ 120,000\). The year-end adjusting entries require an adjustment of \(\$ 15,000\) for depreciation expense for the equipment. After adjustment, the following adjusted amount should be reported: a. A debit of \(\$ 105,000\) for Equipment in the balance sheet column. b. A credit of \(\$ 15,000\) for Depreciation ExpenseEquipment in the income statement column. c. A debit of \(\$ 120,000\) for Equipment in the balance sheet column. d. A debit of \(\$ 15,000\) for Accumulated Depreciation Equipment in the balance sheet column.

Cash of \(\$ 100\) received at the time the service was provided was journalized and posted as a debit to Cash \(\$ 100\) and a credit to Accounts Receivable \(\$ 100\). Assuming the incorrect entry is not reversed, the correcting entry is: a. debit Service Revenue \(\$ 100\) and credit Accounts Receivable \(\$ 100\). b. debit Accounts Receivable \(\$ 100\) and credit Service Revenue \(\$ 100\). c. debit Cash \(\$ 100\) and credit Service Revenue \(\$ 100\). d. debit Accounts Receivable \(\$ 100\) and credit Cash \(\$ 100\).
See all solutions

Recommended explanations on Math Textbooks

Theoretical and Mathematical Physics

Read Explanation

Statistics

Read Explanation

Calculus

Read Explanation

Logic and Functions

Read Explanation

Discrete Mathematics

Read Explanation

Probability and Statistics

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.