A balance sheet lists assets in order of their dollar value, from smallest to largest. O liquidity, with the most liquid assets listed first. O date of acquisition, with the most recently acquired assets listed first. O income generating ability.
The Correct Answer and Explanation is :
The correct answer is:
Liquidity, with the most liquid assets listed first.
Explanation:
A balance sheet is one of the fundamental financial statements used to provide a snapshot of a company’s financial position at a specific point in time. It is structured in a standardized format, listing assets, liabilities, and equity.
Why Assets Are Ordered by Liquidity
Liquidity refers to how quickly an asset can be converted into cash without significant loss in value. The most liquid assets, like cash itself, are listed first because they are readily available to meet short-term obligations.
For example:
- Cash is the most liquid asset and is always listed first.
- Marketable securities or short-term investments are next, as they can usually be sold quickly.
- Accounts receivable follow, as they represent money owed to the business that can be collected within a short period.
- Inventory comes after, as it may require time to be sold and converted to cash.
- Long-term assets like property, plant, and equipment (PPE) are listed later because they are less liquid and cannot be easily converted into cash.
Importance of Listing by Liquidity
- Financial Analysis: Organizing by liquidity helps investors, creditors, and management assess the company’s ability to meet its short-term obligations.
- Decision Making: By observing the liquidity order, stakeholders can evaluate whether the company has enough liquid assets to cover liabilities.
- Standardization: This convention ensures consistency across financial statements, allowing easier comparison among companies.
Other criteria, such as dollar value, date of acquisition, or income-generating ability, are not suitable because they do not align with the purpose of the balance sheet, which is to provide a clear view of the company’s financial flexibility and solvency.