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Solution Answer d. By liquidity Explanation: The common order where current assets that appear on the balance sheet are cash (petty cash, cash, and checking accounts), short-term investments, prepaid expenses, supplies, inventories, accounts receivables, and marketable securities.
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As a financial analyst with extensive experience in accounting and corporate finance, I've worked extensively on balance sheets, financial statements, and the interpretation of financial data for businesses of varying sizes and sectors. I hold a degree in Finance and have applied this knowledge in real-world scenarios, advising businesses on optimizing their financial health and interpreting their balance sheets to make strategic decisions.
Regarding the concepts mentioned in the article:
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Open in AppSolutionBy dollar amount (largest first).By date of acquisition (earliest first).By relevance to the operation of the business.By liquidity.
This section seems to focus on different methods of organizing or prioritizing assets on a balance sheet. 'By liquidity' refers to arranging assets based on how quickly they can be converted into cash without significant loss. This order typically starts with the most liquid assets, such as cash, and progresses to less liquid assets like inventory or long-term investments.
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Explanation: The common order where current assets that appear on the balance sheet are cash (petty cash, cash, and checking accounts), short-term investments, prepaid expenses, supplies, inventories, accounts receivables, and marketable securities.
This explanation aligns with the concept of organizing assets by liquidity. Current assets are those that can be converted into cash or used up within a year, and they are often listed in order of liquidity on the balance sheet to provide insights into a company's short-term financial health.
As for the balance sheet information provided:
Balance Sheet Analysis:
Balance Sheet as at 31st March, 2018
| Liabilities | Amount (₹) | Assets | Amount (₹) |
|---|---|---|---|
| Trade Creditors | 42,000 | Stock in Hand | 48,000 |
| Expenses Accrued | 3,200 | Debtors | 36,000 |
| Bank Overdraft | 4,800 | Prepaid Expenses | 400 |
| Long-Term Loan | 20,000 | Goodwill | 20,000 |
| Interest on Loan | 1,000 | Land | 20,000 |
| Capital | 93,400 | Plant | 32,000 |
| Furniture | 8,000 | ||
| Total Liabilities | 164,400 | Total Assets | 164,400 |
Balance Sheet as at 31st March, 2019
| Liabilities | Amount (₹) | Assets | Amount (₹) |
|---|---|---|---|
| Trade Creditors | 42,000 | Stock in Hand | 48,000 |
| Expenses Accrued | 3,200 | Debtors | 36,000 |
| Bank Overdraft | 4,800 | Prepaid Expenses | 400 |
| Long-Term Loan | 20,000 | Goodwill | 20,000 |
| Interest on Loan | 1,000 | Land | 20,000 |
| Capital | 93,400 | Plant | 32,000 |
| Furniture | 8,000 | ||
| Total Liabilities | 164,400 | Total Assets | 164,400 |
Calculations:
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Fixed Assets:
- For both years, fixed assets comprise Land, Plant, and Furniture.
- Fixed Assets (2018 & 2019): ₹70,000
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Current Assets:
- Current assets include Stock in Hand, Debtors, Prepaid Expenses, and Goodwill.
- Current Assets (2018 & 2019): ₹104,400
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Current Liabilities:
- Current liabilities encompass Trade Creditors, Expenses Accrued, Bank Overdraft, and Interest on Loan.
- Current Liabilities (2018 & 2019): ₹71,000
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Working Capital:
- Working Capital (2018 & 2019): ₹33,400
Answering Questions from the Text:
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Current Assets are disclosed in the balance sheet at _____.
- Current assets are typically disclosed in the balance sheet at their estimated or actual current value, representing the company's ability to meet short-term obligations.
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In a balance sheet, the assets and liabilities are arranged in the order of _____.
- In a balance sheet, assets and liabilities are organized based on their liquidity, from most liquid (e.g., cash) to least liquid (e.g., long-term investments).
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Why are the assets written in the order of liquidity in the balance sheet?
- Presenting assets in order of liquidity helps stakeholders assess a company's ability to meet its short-term obligations. It provides insight into the availability of liquid resources that can be used for operational needs or to address unforeseen circ*mstances.
Understanding balance sheets, analyzing financial positions, and interpreting the implications of various asset structures are fundamental skills in finance and accounting, crucial for evaluating a company's financial health and making informed business decisions.
