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Chapter 5: Q6Q (page 237)

What is meant by liquidity? Rank the following assets from one to five in order of liquidity.

(a) Goodwill.

(b) Inventory.

(c) Buildings.

(d) Short-term investments.

(e) Accounts receivable.

Short Answer

Expert verified

Liquidity can be defined as the easiness of converting assets into cash. The ranking of assets is made based on thetime required to convert them into cash.

Step by step solution

01

What is Liquidity

The efficiency of the business entity to generate cash as early as possible by selling its current assets is known as liquidity. Financial analysts use ratio analysis to determine the liquidity of the company.

02

Order of Liquidity

  1. Short-term investment.
  2. Accounts receivable.
  3. Inventory.
  4. Building.
  5. Goodwill.

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Most popular questions from this chapter

EXCEL (Balance Sheet Preparation) Presented below are a number of balance sheet items for Montoya, Inc., for the current year, 2017.

Goodwill

\(125,000

Accumulated depreciation - equipment

\)292,000

Payroll tax payable

177,591

Inventory

239,800

Bond payable

300,000

Rent payable (short-term)

45,000

Discount on bond payable

15,000

Income tax payable

98,362

Cash

360,000

Rent payable (long-term)

480,000

Land

480,000

Common stock, \(1 par value

200,000

Notes receivable

445,700

Preferred stock, \)10 par value

150,000

Note payable

265,000

Prepaid expenses

87,920

Account payable

490,000

Equipment

1,470,000

Retained earnings

Debt investment (trading)

121,000

Income tax receivable

97,630

Accumulated depreciation – building

270,200

Note payable (Long-term)

1,600,000

Buildings

1,640,000

Instructions

Prepare a classified balance sheet in good form. Common stock authorized was 400,000 shares, and preferred stock authorized was 20,000 shares. Assume that notes receivable and notes payable are short-term unless stated otherwise. The cost and fair value of equity investments (trading) are the same.

2. Current assets under IFRS are listed generally:

(a) by importance.

(b) in the reverse order of their expected conversion to cash.

(c) by longevity.

(d) alphabetically.

What is a “Summary of Significant Accounting Policies”?

(Classification of Balance Sheet Accounts) Presented below are the captions of Faulk Company’s balance sheet.

(a) Current assets

(f) Current liabilities

(b) Investments

(g) Noncurrent liabilities

(c) Property, plant, and equipment

(h) Capital stock

(d) Intangible assets

(i) Additional paid-in capital

(e) Other assets

(j) Retained earnings

Instructions

Indicate by letter where each of the following items would be classified.

1. Preferred stock

11. Cash surrender value of life insurance

2. Goodwill

12. Note payable

3. Salaries and wages payable

13. Supplies

4. Account payable

14. Common stock

5. Building

15. Land

6. Equity investment (trading)

16. Bond sinking fund

7. Current maturity of long-term debt

17. Inventory

8. Premium on bond payable

18. Prepaid insurance

9. Allowance for doubtful accounts

19. Bond payable

10. Accounts receivable

20. Income tax payable

Where should the following items be shown on the balance sheet, if shown at all?

(a) Allowance for doubtful accounts.

(b) Merchandise held on consignment.

(c) Advances received on sales contract.

(d) Cash surrender value of life insurance.

(e) Land.

(f) Merchandise out on consignment.

(g) Franchises.

(h) Accumulated depreciation of equipment.

(i) Materials in transit—purchased f.o.b. destination.
See all solutions

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