10 Questions
What is the classification of restricted cash that is expected to be used within one year?
Current asset
How are short-term investments that a company intends to sell within a year reported?
As current assets
What is the term used for receivables that result from loans or advances made by the company to individuals or other entities?
Nontrade receivables
How are accounts receivable typically reported on the balance sheet?
$2,749 million
What is the primary purpose of inventory for a retail or wholesale company?
To produce goods for sale
What does the operating cycle of a company refer to?
The duration from the sale of finished goods until the collection of cash from the customer.
How does the operating cycle differ for a manufacturing company compared to a merchandising company?
Manufacturing companies deal with raw materials conversion to finished products, while merchandising companies don't.
When does a company classify assets as current assets if the operating cycle extends beyond one year?
At the end of the second year from the balance sheet date.
How does a shipbuilding company with a long operating cycle classify its assets in the balance sheet?
Both current and non-current assets are classified based on when they will be realized into cash.
Why is the one-year convention used to classify assets and liabilities in most businesses?
To standardize financial reporting and facilitate comparisons across different companies.
Study Notes
Classification of Restricted Cash
- Restricted cash that is expected to be used within one year is classified as a current asset.
Short-Term Investments
- Short-term investments that a company intends to sell within a year are reported as current assets.
Receivables
- Receivables that result from loans or advances made by the company to individuals or other entities are referred to as notes receivable.
Accounts Receivable
- Accounts receivable are typically reported on the balance sheet as current assets.
Purpose of Inventory
- The primary purpose of inventory for a retail or wholesale company is to sell or distribute it to customers.
Operating Cycle
- The operating cycle of a company refers to the time it takes to sell inventory, collect receivables, and pay cash to suppliers.
Comparison of Operating Cycle
- The operating cycle differs for a manufacturing company compared to a merchandising company in that manufacturing companies have a longer operating cycle due to the time required to produce and sell products.
Classification of Assets
- If the operating cycle extends beyond one year, a company classifies assets as current assets if they are expected to be converted to cash or used up within the operating cycle or one year, whichever is longer.
Shipbuilding Company
- A shipbuilding company with a long operating cycle classifies its assets in the balance sheet as non-current assets.
One-Year Convention
- The one-year convention is used to classify assets and liabilities in most businesses because it provides a clear and consistent guideline for distinguishing between current and non-current items.
Learn about the concept of the operating cycle in merchandising and manufacturing companies, which involves the period from purchasing inventory to collecting cash from customers. Understand the differences in the initial purchase of inventory between merchandising and manufacturing companies.
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