Question

Why do you think a distinction is made on the balance sheet between current and between fixed assests and between current and long-term liabilities?

Answer 1

Distinguishing between current and non-current assets and liabilities helps to understand the financial position of the company. Current assets are assets which can be easily converted into cash within one year from balance sheet date and are available mainly to repay current liabilities. Fixed assets are held for more than one year and is used in conducting business operation which are financed by long term liabilities. Current liabilities are liabilities payable within one year from balance sheet date and long term liabilities would require payment after one year and are obtained to finance the purchase of assets. The distinction between the two would help to understand liquidity of company where there is enough cash available to finance business and if not then company may have to borrow fund. The distinction also helps in determining the leverage position of company.