A balance sheet lists assets in order of their __. dollar value, from smallest to largest date of acquisition, with the most recently acquired assets listed first liquidity, with the most liquid assets listed first income generating ability
The correct answer and explanation is:
The correct answer is: liquidity, with the most liquid assets listed first.
Explanation:
A balance sheet is a financial statement that provides a snapshot of a company’s financial position at a specific point in time. It lists the company’s assets, liabilities, and equity.
When it comes to listing assets on the balance sheet, the order is generally based on liquidity. Liquidity refers to how quickly and easily an asset can be converted into cash without significantly affecting its value.
Why liquidity?
- The balance sheet typically starts with the most liquid assets and proceeds to those that are less liquid.
- The most liquid asset is cash, followed by cash equivalents (like marketable securities), accounts receivable (money owed to the company), inventory, and then long-term assets such as property, plant, and equipment.
- This ordering gives financial statement users a clear picture of how quickly the company can meet its short-term obligations and access cash.
Why not the other options?
- Dollar value, from smallest to largest: Assets are not organized based on their dollar value because that wouldn’t provide useful information about liquidity or usability. For example, a small amount of cash is more liquid than a very valuable piece of machinery.
- Date of acquisition, with the most recently acquired assets listed first: Assets are not listed by the date they were acquired. The timing of acquisition is irrelevant to the purpose of the balance sheet, which is to show financial position, not acquisition history.
- Income generating ability: Although assets do contribute to income generation, this is not the basis for listing them on the balance sheet. Income generation is reflected in the income statement, not the balance sheet.
Summary:
By listing assets in order of liquidity on the balance sheet, users can quickly assess how readily a company can convert assets to cash to pay liabilities. This structure is a key part of financial reporting standards and helps maintain consistency across organizations and industries.