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Simplified balance sheet versus Classified Balance sheet

Balance Sheet clearly reports the assets, liabilities, and stockholders' equity of a company at a specific point in time. The term common used is to present a 'snapshot' of the Assets, Liabilities and Owners' Equity. This 'as of date' should always appear in the heading of the statement to disclose to the potential readers/users on what date the value of the items were determined to be.

There are two methods of presenting a Balance Sheet, the simple method or the classified method. The simple method will list all the Assets into one category, all the Liabilities into one category, with the Owners Equity section then listed. For the Classified Balance Sheet, the different general sections are further categorized beyond the general classifications of Assets, Liability and Owners Equity. The Classified Balance Sheet will group all Current Assets and Current Liabilities separate from the Long-term Assets and Long-term Liabilities. Current Assets are Assets that are expected to be converted to cash or used in the business within one year or one operating cycle. Current Liabilities are Obligations that are expected to be paid within the current year or operating cycle. Current Assets are listed in the order in which they can be converted into cash. Current Liabilities normally list Notes Payable and Accounts Payable first with the remaining accounts listed in the order in which they are expected to be paid. The Long-term Assets are Assets that are expected to be held for at least one year. There are too many examples to list here, but they could be Investment related or things like Property, Plant and Equipment currently being utilized by the Company. Long-term Liabilities are obligations due or expected to be paid after one year.

Given the differences in the two reporting methods, what method produces more useful information for the user of the statement? Should one method be mandated over the other? Why would a company prefer to issue a simplified Balance Sheet? Why would they prefer to issue a Classified Balance Sheet?

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Given the differences in the two reporting methods, what method produces more useful information for the user of the statement? Should one method be mandated over the other? Why would a company prefer to issue a simplified Balance Sheet? Why would they prefer to issue a Classified Balance Sheet?

Classified balance sheet depicts more information about the financial position of the company than the simplified balance sheet.

Classified balance sheet should be mandated because balance sheet is the one of the financial statements which should be prepared and published to the public. Public can know about the financial position better only if the balance sheet is elaborative. If the balance sheet, ...

Solution Summary

A simplified balance sheet versus classified balance sheet is examined.

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