10 Questions
What are assets classified into?
Current and non-current assets
What are the characteristics of current assets?
Expected to be converted into cash within one year or within the company's normal operating cycle and are highly liquid
What is the main characteristic of non-current liabilities?
Expected to be paid or settled more than one year or beyond the company's normal operating cycle
What does equity represent in a business?
The ownership interest in the business
What is the formula for calculating the current ratio?
Current Ratio = Current Assets / Current Liabilities
What does a higher current ratio indicate?
A higher liquidity and ability to pay short-term debts
What are examples of current liabilities?
Accounts payable, short-term loans, and accrued expenses
What are examples of non-current assets?
Long-term loans, bonds, and mortgage loans
Why do current liabilities require immediate attention?
Because they are expected to be paid or settled within one year or within the company's normal operating cycle
What happens to equity when a company makes a profit?
It increases
Study Notes
Assets
- Resources owned or controlled by a business
- Expected to generate future economic benefits
- Classified into:
- Current assets: expected to be converted into cash or used up within one year or within the company's normal operating cycle
- Non-current assets: expected to be used for more than one year or beyond the company's normal operating cycle
Current Assets
- Examples:
- Cash
- Accounts receivable (amounts customers owe the company)
- Inventory
- Prepaid expenses
- Short-term investments
- Characteristics:
- Expected to be converted into cash within one year or within the company's normal operating cycle
- Highly liquid
Liabilities
- Debts or obligations that a business must pay or settle
- Classified into:
- Current liabilities: expected to be paid or settled within one year or within the company's normal operating cycle
- Non-current liabilities: expected to be paid or settled more than one year or beyond the company's normal operating cycle
Current Liabilities
- Examples:
- Accounts payable (amounts the company owes to suppliers)
- Short-term loans
- Accrued expenses (salaries, taxes, etc.)
- Unearned revenue
- Characteristics:
- Expected to be paid or settled within one year or within the company's normal operating cycle
- Require immediate attention
Non-Current Liabilities
- Examples:
- Long-term loans
- Bonds
- Mortgage loans
- Characteristics:
- Expected to be paid or settled more than one year or beyond the company's normal operating cycle
- Do not require immediate attention
Equity
- Represents the ownership interest in a business
- Also known as net worth or shareholders' equity
- Increases when the company makes a profit and decreases when the company incurs a loss
Current Ratio
- Calculated by dividing current assets by current liabilities
- Formula: Current Ratio = Current Assets / Current Liabilities
- Interpreted as:
- A higher ratio indicates a higher liquidity and ability to pay short-term debts
- A lower ratio indicates a lower liquidity and ability to pay short-term debts
Assets
- Resources owned or controlled by a business, expected to generate future economic benefits
- Classified into:
- Current assets: expected to be converted into cash or used up within one year or within the company's normal operating cycle
- Non-current assets: expected to be used for more than one year or beyond the company's normal operating cycle
Current Assets
- Examples: cash, accounts receivable, inventory, prepaid expenses, short-term investments
- Characteristics: expected to be converted into cash within one year or within the company's normal operating cycle, highly liquid
Liabilities
- Debts or obligations that a business must pay or settle
- Classified into:
- Current liabilities: expected to be paid or settled within one year or within the company's normal operating cycle
- Non-current liabilities: expected to be paid or settled more than one year or beyond the company's normal operating cycle
Current Liabilities
- Examples: accounts payable, short-term loans, accrued expenses, unearned revenue
- Characteristics: expected to be paid or settled within one year or within the company's normal operating cycle, require immediate attention
Non-Current Liabilities
- Examples: long-term loans, bonds, mortgage loans
- Characteristics: expected to be paid or settled more than one year or beyond the company's normal operating cycle, do not require immediate attention
Equity
- Represents the ownership interest in a business
- Also known as net worth or shareholders' equity
- Increases when the company makes a profit and decreases when the company incurs a loss
Current Ratio
- Calculated by dividing current assets by current liabilities
- Formula: Current Ratio = Current Assets / Current Liabilities
- Interpretation:
- Higher ratio: higher liquidity and ability to pay short-term debts
- Lower ratio: lower liquidity and ability to pay short-term debts
Learn about the different types of assets in accounting, including current and non-current assets, and their characteristics. Understand how to classify assets and their expected economic benefits.
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