Case Study

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Student’s Name:

NOTE: The project will be done using CONNECT – The student will be provided feedback (once) on cases submitted by the due date. It is the student’s responsibility to send the Instructor an email – shayes@vbgov.com informing them that their chapter cases are ready for review (worth 3 pts.) (All cases in the chapter must be completed before the Instructor will review the cases) are ready for review. No cases will be reviewed past the required submission date. Communication Case 3–1

A first-year accounting student is confused by a statement made in a recent class. Her instructor stated that the assets listed in the balance sheet of the IBM Corporation include computers that are classified as current assets as well as computers that are classified as noncurrent assets. In addition, the instructor stated that investments in marketable securities of other corporations could be classified in the balance sheet as either current or noncurrent assets.

Required:

Explain to the student the distinction between current and noncurrent assets pertaining to the IBM computers and the investments in marketable securities.

Answer:

Balance sheets are usually arranged in a particular order whereby financial statement elements are categorized in subgroups. This arrangement facilitates review of the balance sheet information by interested parties. The categories (or subgroups) included in the classified balance sheet may be as follows: Assets| Liabilities and Equity|

Current assets:  Cash  Accounts Receivable  Notes Receivables  Prepaid AssetsNon-current Assets:  Long-term Investments  Property, Plant and Equipment  Intangible Assets| Current Liabilities:  Accounts Payable  Accrued Expenses  Customer Deposits  Current Maturities of Long-term DebtLong-term Liabilities:  Bank Loan  Deferred Tax LiabilityOwner's (or Shareholder's) Equity|

Of course, other categories may be presented on the balance sheet. For example, a category called other assets or other liabilities may be included in either current or non-current assets or liabilities, respectively. As you can see from the table above, assets and liabilities are presented with current ones first followed by long-term ones. The difference between the current assets and liabilities is called working capital and is one of the liquidity measures of a company. Terms current and short-term are used interchangeably, and so are non-current and long-term.

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Current assets: are cash and other resources that are reasonably expected to be realized in cash or sold or consumed within one year of the balance sheet date or the company's operating cycle, whichever is longer. -------------------------------------------------

Current liabilities: are obligations that are reasonably expected to be paid from existing current assets or through the creation of other current liabilities. -------------------------------------------------

Operating cycle: is the average time that is required to go from cash to cash in producing revenues. Assets and liabilities which are not current fall into the non-current (long-term) assets and liabilities, respectively. Normally, companies utilize one year in classifying assets as current or non-current because the operating cycle of such companies is shorter than a year. However, there are companies whose operating cycle is more than a year. For example, a cruise ship manufacturer may have an operating cycle longer than a year because it takes more time to build a ship (cash expenditures) and sell it (cash receipt). In such cases, the current versus non-current classification will be based on a period longer than a year after the balance sheet date.

There are many different examples of current and noncurrent assets and liabilities. The chart below will show how to understand if it current or noncurrent asset or liability. Examples of Current Assets:|...
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