Question

Explain to your classmates what assets, liabilities, and equity are and tell which financial statement includes these items. On a classified balance sheet, you see current assets and current liabilities as well as long-term assets and long-term liabilities. Why is it important to classify items as current and long-term? How would management use this information and how would creditors use this information? please include references.

Answer 1

Assets: Assets are what the company has ownership over, and these provide the firm with long term economic benefit.

Liabilities: Liabilities is what the company owes to the outsiders.

equity:  Assets = Liabilities + Equity.

Equity refers to ownership. it is the total amount contributed by the owners of the company.

The balance sheet includes the assets, liabilities and equity.

the current assets are assets which are to be converted into cash within a year.

Long-term liabilities are financial obligations of a company that become due more than one year. Current assets are necessary for the ongoing operations of the company.

That is why it is necessary to differentiate between the current and long term .

Managers use this information to decipher the financial health of the company. To know about the current liquidity position and the long term liabilities which are due. To also know about the assets and the liabilities which are due.

Managers use the current assets position to understand the liquidity position of the company and make efforts to add current assets if they are not sufficient to pay the liabilities which come due within a year.

Creditors use this information to make sure weather the company is in a position to return back the money loaned to it. The equity position of the company helps them understand percentage stake does the owners have in the company and how much of the company is externally financed.

For example If there is too much debt , then creditors may not find loaning any more money as feasible.