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Accounting Chapter 4 Notes

Liabilities the balance sheet lists liabilities in

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Unformatted text preview: –revenues, expenses or dividends- are included because they have been closed (their balances are zero). The ledger is not up- to- date and ready for the next period. Assets and Liabilities - Assets and liabilities are classified as either current or long- term to show their relative liquidity. Catherine Liou - Liquidity measures how quickly and easily an account can be converted to cash, because cash is the most liquid asset. Accounts receivable are relatively liquid because receivables are collected quickly. Supplies are less liquid, and furniture and buildings are even less so because they take longer to convert to cash. - A Classified balance sheet lists assets in order of their liquidity. Assets - Balance sheet lists assets in liquidity order. Balance sheet reports two asset categories: Current assets and long- term assets Current Assets - Current Assets: Will be converted to cash, sold, or used up during the next 12 months, or within the business’s operating cycle if the cycle is longer than a year. - The operating cycle is the time span when 1. Cash is used to acquire goods and services. 2. These goods and services are sold to customers, and 3. The business collects cash from customers (For most companies, the operating cycle is a few months) - Merchandising entities such as Lowes and Coca- Cola have another current asset: Inventory. Inventory shows the cost of the goods the company holds for sale to customers. Long- Term Assets - Long- term Assets: are all the assets that will not be converted to cash within the business’s operating cycle. Long- term assets can be used for more than a year (like a car or a computer). Land, building, furniture, and equipment are plant assets. Liabilities - The balance s...
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