Accounting: Assets Classification
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Questions and Answers

What are assets classified into?

  • Fixed and variable assets
  • Current and long-term assets
  • Short-term and long-term assets
  • Current and non-current assets (correct)

    • 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 (correct)
  • Expected to be used for more than one year and are highly liquid
  • Expected to be converted into cash beyond the company's normal operating cycle and are not liquid
  • Expected to be used for more than one year and are not liquid

    • What is the main characteristic of non-current liabilities?

  • Expected to be paid or settled within one year or within the company's normal operating cycle
  • Expected to be paid or settled more than one year or beyond the company's normal operating cycle (correct)
  • Expected to be converted into cash within one year or within the company's normal operating cycle
  • Expected to be used for more than one year

    • What does equity represent in a business?

    <p>The ownership interest in the business</p> Signup and view all the answers

    What is the formula for calculating the current ratio?

    <p>Current Ratio = Current Assets / Current Liabilities</p> Signup and view all the answers

    What does a higher current ratio indicate?

    <p>A higher liquidity and ability to pay short-term debts</p> Signup and view all the answers

    What are examples of current liabilities?

    <p>Accounts payable, short-term loans, and accrued expenses</p> Signup and view all the answers

    What are examples of non-current assets?

    <p>Long-term loans, bonds, and mortgage loans</p> Signup and view all the answers

    Why do current liabilities require immediate attention?

    <p>Because they are expected to be paid or settled within one year or within the company's normal operating cycle</p> Signup and view all the answers

    What happens to equity when a company makes a profit?

    <p>It increases</p> Signup and view all the answers

    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

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    Description

    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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