Question:
The usefulness of the balance sheet is enhanced when assets and liabilities are grouped according to
common characteristics. The broad distinction made in the balance sheet is the current versus noncurrent
classification of both assets and liabilities.
Required:
1. Discuss the factors that determine whether an asset or liability should be classified as current or
noncurrent in a balance sheet.
2. Identify six items that under different circumstances could be classified as either current or noncurrent.
Indicate the factors that would determine the correct classification.
Answer:
Requirement 1
Current assets include cash and other assets that are reasonably expected to be converted to cash or
consumed during one year, or within the normal operating cycle of the business if the operating cycle is
longer than one year. Current liabilities include all liabilities that are scheduled to be liquidated within
one year or the operating cycle, whichever is longer, except those that management intends to refinance
on a long-term basis.
Therefore, key factors determining classification are the nature of the asset or liability,
management’s intent, and the length of the operating cycle.
Requirement 2
Assets:
Cash Normally classified as current, however, if restriction
prohibits use of the cash, could be classified as noncurrent.
Receivables Depends on the expected date of collection.
The usefulness of the balance sheet is enhanced when assets and liabilities are grouped according to
common characteristics. The broad distinction made in the balance sheet is the current versus noncurrent
classification of both assets and liabilities.
Required:
1. Discuss the factors that determine whether an asset or liability should be classified as current or
noncurrent in a balance sheet.
2. Identify six items that under different circumstances could be classified as either current or noncurrent.
Indicate the factors that would determine the correct classification.
Answer:
Requirement 1
Current assets include cash and other assets that are reasonably expected to be converted to cash or
consumed during one year, or within the normal operating cycle of the business if the operating cycle is
longer than one year. Current liabilities include all liabilities that are scheduled to be liquidated within
one year or the operating cycle, whichever is longer, except those that management intends to refinance
on a long-term basis.
Therefore, key factors determining classification are the nature of the asset or liability,
management’s intent, and the length of the operating cycle.
Requirement 2
Assets:
Cash Normally classified as current, however, if restriction
prohibits use of the cash, could be classified as noncurrent.
Receivables Depends on the expected date of collection.
