Chapter 2, Problem 1Q

To determine

Explain the methods in which assets are placed in the balance sheet internationally.

Answer to Problem 1Q

Assets are presented in the balance sheet in the order of liquidity. One method is to place it in ascending order that is least liquid asset first and the highest in the end. Another method is descending order where the highest liquid item is placed first.

Explanation of Solution

Assets:

Asset refers to the valuable held by a corporation that is utilized for production. Every organization is required to prepare balance sheet and assets are placed on the right hand side of the balance sheet. Assets are of two types; liquid and non-liquid. Liquid assets can be converted into cash quickly, like cash in hand; while non-liquid assets are not easily convertible, like inventory.

As per international standards, assets are placed on the basis of liquidity. One way is to place the most liquid asset first and lesser ones thereafter, the least one being in the end.

For example, cash in hand is the most liquid asst. it will be placed first, then short term investments, accounts receivables and so. Prepaid taxes are least liquid, so that would be placed in the end.

Another way is to place the least liquid asset first and the most liquid one in the end.

NA follows the second method where least liquid asset like inventory is placed first and most liquid asset like cash is posted in the end.

E, on the other hand, follows first method of placing highly liquid asset first in the balance sheet while the least liquid one goes in the end.

Conclusion

Thus, both the methods are acceptable as per international norms of preparing a balance sheet.