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A classified balance sheet is one where an accountant places financial information into specific groups. The major groups on a balance sheet include assets, liabilities, and owners' or shareholders' equity. Under the assets and liabilities, sub-groups will contain specific information. This presentation allows for an accurate display of the company's financial health.
Assets represent all the items a company owns and uses to generate revenue. Current assets are those items used in less than 12 months. Cash, inventory, notes receivable, accounts receivable and any other items that will not last very long are in this category. Assets that will be in use for more than 12 months fall under the long-term asset classification, such as investments, property, plant and equipment and intangible assets. Other assets are typically a category companies prefer not to use as it can represent a questionable classification.
Liabilities are similar to assets in classification; like with assets, the classified balance sheet separates money owed into current and long-term groups. This allows financial statement users to determine how much money a company has in terms of current assets which can be used to pay for current liabilities — money owed that needs paying off within 12 months. The same is true for long-term liabilities, where the company typically uses these funds to purchase long-term assets.
Users of the company's classified balance sheet often conduct a ratio analysis to discover the company's true financial position. While the financial figures listed on the statement can present a healthy outlook, ratios allow users to compare the statement to the industry average. A common ratio is the total debts to total assets ratio. This indicates how much leverage the company uses to pay for assets. An indicator over 1.0 indicates that more than $1 US Dollar (USD) of every asset comes from debt use, which is often unsustainable financially.
The business environment is quickly beginning to prefer the classified balance sheet over a company's income statement. The balance sheet presents the true economic wealth generated by the company through its operations. By subtracting the total liabilities from total assets, financial statement users can calculate the actual value of the company. This calculation often helps shareholders determine how much money they may receive if the company enters bankruptcy and liquidates its assets.
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