Chapter 2: Classified Balance Sheet

A classified balance sheet provides a more detailed view of a company's financial position by organizing assets and liabilities into current and noncurrent categories, allowing stakeholders to better assess the liquidity and financial health of a business. Here’s a breakdown of how to prepare and understand the structure of a classified balance sheet: 1. Structure of a Classified Balance Sheet A classified balance sheet divides assets and liabilities into various categories: • • • Assets: Divided into current assets and noncurrent assets. Liabilities: Divided into current liabilities and long-term liabilities. Equity: Contains owner's or stockholders' equity, such as common stock and retained earnings. 2. Categories Explained 1. Current Assets: o Assets expected to be converted to cash or used up within one year or the company’s operating cycle, whichever is longer. o Examples:  Cash  Accounts Receivable  Inventory  Prepaid Expenses (e.g., insurance)  Short-term Investments 2. Noncurrent Assets: o Long-term Investments: Investments intended to be held for more than one year.  Examples: Bonds, stocks, long-term notes receivable. o Plant Assets (Property, Plant, and Equipment or PP&E): Longlived tangible assets used in operations.  Examples: Buildings, machinery, equipment, land. o Intangible Assets: Non-physical assets with long-term value.  Examples: Patents, trademarks, goodwill. 3. Current Liabilities: o Obligations that are due within one year or the operating cycle, whichever is longer. o Examples:  Accounts Payable  Wages Payable  Interest Payable  Taxes Payable  Unearned Revenue Current portion of long-term debt (e.g., part of a loan due within a year) 4. Long-Term Liabilities: o Obligations due after one year. o Examples:  Notes Payable (due in more than one year)  Bonds Payable  Mortgage Payable 5. Equity: o Represents the owners' claims on the assets of the company after all liabilities are settled. o Examples:  Common Stock  Retained Earnings  3. Preparing a Classified Balance Sheet Using the provided account balances from Magic Company’s post-closing trial balance, here is an example of a classified balance sheet as of December 31: ruby Magic Company Classified Balance Sheet December 31, 2021 Assets -----------------------------------------------------Current Assets: Cash $XX,XXX Accounts Receivable $X,XXX Inventory $X,XXX Prepaid Insurance $X,XXX Total Current Assets $XX,XXX Noncurrent Assets: Long-Term Investments $X,XXX Property, Plant, and Equipment: Equipment $XX,XXX Less: Accumulated Depreciation $(X,XXX) Net Equipment $XX,XXX Intangible Assets: Patents $X,XXX Total Noncurrent Assets $XX,XXX Total Assets $XX,XXX Liabilities and Equity -----------------------------------------------------Current Liabilities: Accounts Payable $X,XXX Wages Payable $X,XXX Interest Payable $X,XXX Unearned Revenue $X,XXX Total Current Liabilities $XX,XXX Long-Term Liabilities: Notes Payable Total Long-Term Liabilities $XX,XXX $XX,XXX Total Liabilities $XX,XXX Equity: Common Stock Retained Earnings Total Equity $XX,XXX $XX,XXX $XX,XXX Total Liabilities and Equity $XX,XXX 4. Key Points in Preparing the Balance Sheet: • • • Order of Accounts: Current assets and liabilities are listed before noncurrent ones, and within each category, items are listed in the order of liquidity (how quickly they can be converted to cash or settled). Separation of Current and Long-Term Items: This distinction helps users understand what obligations and resources will come due or be available in the short term versus those that are part of long-term plans. Balancing the Sheet: Total assets must always equal the total of liabilities and equity, ensuring that the balance sheet is balanced.