Multiple Choice
Which of the following best describes the calculation of the payback period for an investment when net cash flows are uneven?
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7. Receivables and Investments
Introduction to Investments in Securities
Multiple Choice
A 30-year home mortgage is a classic example of:
A
a current asset
B
a long-term liability
C
an equity security
D
a short-term investment
Verified step by step guidance1
Understand the concept of a mortgage: A mortgage is a loan secured by real estate, typically used to purchase a home. It involves a borrower making regular payments over a specified period, such as 30 years.
Classify the nature of the mortgage: Since the mortgage spans 30 years, it is not expected to be paid off within the current accounting period (usually one year). This makes it a long-term financial obligation.
Define long-term liability: In financial accounting, a long-term liability refers to obligations that are due beyond one year or the operating cycle of the business. Examples include mortgages, bonds payable, and long-term loans.
Eliminate incorrect options: A current asset refers to resources expected to be converted into cash or used within one year, which does not apply to a mortgage. Equity security represents ownership in a company, and a short-term investment is typically held for less than a year. None of these fit the description of a 30-year mortgage.
Conclude that the correct classification for a 30-year home mortgage is a long-term liability, as it represents a financial obligation extending beyond one year.
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