Why is it important to distinguish between current and long term assets and liabilities? Why not...

Why is it important to distinguish between current and long term assets and liabilities? Why not just lump them all together?

Expert Solution

Current Liabilities are the short term obligation that are due within one year and will require cash payment. Long term liabilities are the obligation which is due for more than one year. Hence segregation between these are important to determine the immediate liquidity needs of the company. As the current liabilities needs to be paid in one year so sufficient cash should be there to fulfill these obligations. If we do not segregate it than how much cash we need immediately would be unable to be determined.

Current Assets are assets that are more liquid and easily convertible into cash current assets help us to determine that how much financial assets it has to meets its short term obligation/the liabilities that will be due within one year. Long term assets are the assets held by the company for more than one year like property, plant and equipment. The segregation between current assets and long term assets is important as than we are able to know that how much financial assets can be converted into cash immediately. It also helps us to know the liquidity position.

The segregation are important as it also helps in calculation various ratios, and also helps in determining operational efficiency and financial strength.

ekkarill92 answered 2 years ago

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