Passage Four
　　On the balance sheet, assets and liabilities are classified as either current or long-term to indicate their relative liquidity. Liquidity is a measure of how quickly an item may be converted to cash. Therefore cash is the most liquid asset. Account receivable is a relatively liquid asset because the business expects to collect the amount in cash in the near future. Supplies are less liquid than accounts receivable, and furniture and buildings are even less so. Users of financial statements are interested in liquidity because business difficulties often arise owing to a shortage of cash. Balance sheets list assets and liabilities in the order of their relative liquidity.
　　Current Assets. Current assets are assets that are expected to be converted to cash, sold, or consumed during the next 12 months or within the business’s normal operating cycle if longer than a year. The operating cycle is the time span during which (1) cash is used to acquire goods and services, and (2) these goods and services are sold to customers, who in turn pay for their purchases with cash. For most businesses, the operating cycle is a few months. A few types of business have operating cycles longer than a year. Cash Accounts Receivable, Notes receivable due within a year or less are current assets. Merchandising entities such as Sears, Penney’s and K Mart have an additional current asset. Inventory. This account shows the cost of goods that are held for sale to customers.
　　Long-term Assets. Long-term assets are all assets other than current assets. They are not held for sale,
　　but rather they are used to operate the business. One category of long-term assets is plant assets, or fixed assets. Land, buildings, furniture and fixtures, and equipment are examples of plant assets.
　　Financial statement users such as creditors are most interested in the due dates of an entity’s liabilities. The sooner a liability must be paid, the more current it is. Liabilities that must be paid on the earliest future date create the greatest stain on cash. Therefore, the balance sheet lists liabilities in the order in which they are due. Knowing how many of a business’s liabilities are current and how many are long-term helps creditors assess the likelihood of collecting from the entity. Balance sheets usually have at least two liability classifications, current liabilities and long-term liabilities.
　　Current liabilities. Current liabilities are debts that are due to be paid within one year, or within the entity’s operating cycle. Notes Payable due within one year, Salary Payable, Unearned Revenue, and Interest Payable owed on notes payable are current liabilities.
　　Long-term Liabilities. All liabilities that are not current are classified as long-term liabilities. Other notes payable are paid in installments, with the first installment due within one year, the second installment due the second year, and so on. In this case, the first installment would be a current liability and the remainder a long-term liability.
　　75. Which is the most liquid asset on the balance sheet except cash.
　　A. Accounts Receivable.
　　B. Notes Receivable.
　　C. Supplies.
　　D. Inventory.
　　76. Liquidity is a measure of _______.
　　A. how safely an item may be converted to cash.
　　B. how much an item may be converted to cash.
　　C. how immediately an item may be encashed.
　　D. how quickly the goods may be sold to customer.
　　77. Long-term assets __________.
　　A. are not held for sale, but rather they are used to operate the business
　　B. are all assets other than current assets
　　C. fixed assets
　　D. both A and B
　　78. ______are examples of plant assets.
　　A. Furniture and inventory
　　B. Equipment and supplies
　　C. Inventory and supplies
　　D. Fixture and buildings
　　79. Which sentence is true about the passage?
　　A. For most businesses, the operating cycle is one year.
　　B. Installments are long liabilities.
　　C. Notes Payable due within one year, Salary Payable, Unearned Revenue, and Interest Payable owed on notes payable are current liabilities.
　　D. Current liabilities are only debts that are due to be paid within one year.
　　80. Creditors are most interested in __________.
　　A. the entity’s creditworthiness
　　B. the expiry date of an entity’s liabilities
　　C. the quality of asset
　　D. the amount of an entity’s liability

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