Question

Explain to your classmates what assets, liabilities, and equity are and tell which financial statement includes...

Explain to your classmates what assets, liabilities, and equity are and tell which financial statement includes these items. On a classified balance sheet, you see current assets and current liabilities as well as long-term assets and long-term liabilities. Why is it important to classify items as current and long-term? How would management use this information and how would creditors use this information?

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Answer #1

An asset is an economic resource which can be tangible or intangible. Liabilities are obligations of the company. Equity represents the ownership interest of the company. These items are included in the balance sheet of the company.

It is important to classify the items as short term and long term to understand the true nature of the item, its periodicity and its impact on the company's immediate profit.

Management would use this information to know whether it has enough assets to service the liabilities of the company both in long and short term. Creditors would use this information to assess the financial health of the company.

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