A classified balance sheet:
A) Measures a company’s ability to pay its bills on time.
B) Organizes assets and liabilities into important subgroups
C) Presents revenues, expenses, and net income.
D) Reports operating, investing, and financing activities.
E) Reports the effect of profit and withdrawals on owner’s capital.
The correct answer and explanation is :
The correct answer is B) Organizes assets and liabilities into important subgroups.
Explanation:
A classified balance sheet is a financial statement that provides a clear and organized view of a company’s financial position. Unlike a regular balance sheet, which may list assets and liabilities in a less structured manner, a classified balance sheet categorizes these elements into distinct, meaningful subgroups. This organization helps users of the financial statements, such as investors, creditors, and management, to better understand the company’s financial health and structure.
Here are the key subgroups typically found in a classified balance sheet:
- Assets:
- Current Assets: These are assets expected to be converted into cash or used up within a year or within the company’s operating cycle, whichever is longer. Examples include cash, accounts receivable, inventory, and short-term investments.
- Non-current Assets (or Long-term Assets): These are assets that are expected to provide benefits beyond one year. Examples include property, plant, equipment (PPE), intangible assets like patents, and long-term investments.
- Liabilities:
- Current Liabilities: These are obligations the company needs to settle within one year. They may include accounts payable, short-term loans, or accrued expenses.
- Non-current Liabilities: These are long-term obligations, such as long-term loans or bonds payable, that are due after more than one year.
- Equity: This section reflects the ownership interest in the company. It includes common stock, retained earnings, and other components of shareholders’ equity.
By classifying the assets, liabilities, and equity, a classified balance sheet gives a clearer picture of a company’s liquidity, financial flexibility, and long-term solvency. This classification helps users assess the business’s ability to meet short-term obligations, invest in growth, and manage long-term debts.
In contrast, the other options (A, C, D, E) refer to different financial statements or concepts not specifically related to the classified balance sheet.