liquid asset can be converted quickly to cash with little sacrifice in its value. Which of the following asset classes is generally considered to be the least liquid? Accounts receivable Plant and equipment Inventories The most recent data from the annual balance sheets of Free Spirit Industries Corporation and LeBron Sports Equipment Corporation are as follows: Balance Sheet December 31st31st (Millions of dollars) LeBron Sports Equipment Corporation Free Spirit Industries Corporation LeBron Sports Equipment Corporation Free Spirit Industries Corporation Assets Liabilities Current assets Current liabilities Cash $3,157 $2,029 Accounts payable $0 $0 Accounts receivable 1,155 743 Accruals 696 0 Inventories 3,388 2,178 Notes payable 3,944 3,712 Total current assets $7,700 $4,950 Total current liabilities $4,640 $3,712 Net fixed assets Long-term bonds 5,672 4,538 Net plant and equipment 6,050 6,050 Total debt $10,312 $8,250 Common equity Common stock $2,235 $1,788 Retained earnings 1,203 962 Total common equity $3,438 $2,750 Total assets $13,750 $11,000 Total liabilities and equity $13,750 $11,000 Free Spirit Industries Corporation’s quick ratio is , and its current ratio is ; LeBron Sports Equipment Corporation’s quick ratio is , and its current ratio is . Which of the following statements are true? Check all that apply. LeBron Sports Equipment Corporation has a better ability to meet its short-term liabilities than Free Spirit Industries Corporation. If a company’s current liabilities are increasing faster than its current assets, the company’s liquidity position is weakening. An increase in the quick ratio over time usually means that the company’s liquidity position is improving and that the company is managing its short-term assets well. Compared to Free Spirit Industries Corporation, LeBron Sports Equipment Corporation has less liquidity and a lower reliance on outside cash flow to finance its short-term obligations. An increase in the current ratio over time always means that the company’s liquidity position is improving.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
| LeBron Sports Equipment Corporation | Free Spirit Industries Corporation | LeBron Sports Equipment Corporation | Free Spirit Industries Corporation | ||
| Assets | Liabilities | ||||
| Current assets | Current liabilities | ||||
| Cash | $3,157 | $2,029 | Accounts payable | $0 | $0 |
| Accounts receivable | 1,155 | 743 | Accruals | 696 | 0 |
| Inventories | 3,388 | 2,178 | Notes payable | 3,944 | 3,712 |
| Total current assets | $7,700 | $4,950 | Total current liabilities | $4,640 | $3,712 |
| Net fixed assets | Long-term bonds | 5,672 | 4,538 | ||
| Net plant and equipment | 6,050 | 6,050 | Total debt | $10,312 | $8,250 |
| Common equity | |||||
| Common stock | $2,235 | $1,788 | |||
| 1,203 | 962 | ||||
| Total common equity | $3,438 | $2,750 | |||
| Total assets | $13,750 | $11,000 | Total liabilities and equity | $13,750 | $11,000 |
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