chapter2 - Illustration21...

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   Illustration 2-1    Standard balance sheet classifications
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Illustration 2-2    Classified balance  sheet Helpful Hint Recall that the accounting equation is Assets = Liabilities + Stockholders' Equity. CURRENT ASSETS Current assets  are assets that a company expects to  convert to cash or use up within one year or its  operating cycle, whichever is longer. Accounts receivable are current assets because the company  will collect them and convert them to cash within one year. A supply is a current asset because the  company expects to use them up in operations within one year. Some companies use a period longer  than one year to classify assets and liabilities as current because they have an operating cycle longer  than one year. The  operating cycle  of a company is the average time that it takes to go from cash to  cash in producing revenue—to purchase inventory, sell it on account, and then collect cash from  customers. For most businesses this cycle takes less than a year, so they use a one-year cutoff. But,  for some businesses, such as vineyards or airplane manufacturers, this period may be longer than a  year.  Except where noted, we will assume that companies use one year to determine whether an  asset or liability is current or long-term. Common types of current assets are (1) cash, (2) short-term investments (such as short-term U.S.  government securities), (3) receivables (notes receivable, accounts receivable, and interest  receivable), (4) inventories, and (5) prepaid expenses (insurance and supplies).  Companies list  current assets in the order in which they expect to convert them into cash Follow this rule when  doing your homework. Illustration  2-3  presents the current assets of  Southwest Airlines Co.  
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Illustration 2-3    Current assets  section As explained later in the chapter, a company's current assets are important in assessing its short-term  debt-paying ability. LONG-TERM INVESTMENTS are often referred to simply as investments . Long-term investments  are generally: (1) investments in stocks and bonds of other corporations that  are held for more than one year, and (2) long-term assets such as land or buildings that a company is  not currently using in its operating activities. In Illustration  2-2  Franklin Corporation reported total  long-term investments of $7,200 on its balance sheet. Yahoo! Inc.
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chapter2 - Illustration21...

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