Multiple Choice
A classified balance sheet shows subtotals for current and noncurrent categories. Which of the following pairs correctly represents these categories?
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2. Transaction Analysis
Classified Balance Sheet Components
Multiple Choice
Match each of the following accounts to its proper balance sheet classification. Which of the following is correctly matched?A) Accounts Receivable — Current AssetB) Accumulated Depreciation — Current LiabilityC) Prepaid Insurance — Long-term LiabilityD) Common Stock — Current Asset
A
B) Accumulated Depreciation — Current Liability
B
D) Common Stock — Current Asset
C
A) Accounts Receivable — Current Asset
D
C) Prepaid Insurance — Long-term Liability
Verified step by step guidance1
Step 1: Understand the classifications on the balance sheet. The balance sheet is divided into three main sections: Assets, Liabilities, and Equity. Assets are further classified as Current Assets (expected to be converted to cash or used within one year) and Non-Current Assets (long-term assets). Liabilities are divided into Current Liabilities (due within one year) and Long-term Liabilities (due after one year). Equity represents ownership interest in the company.
Step 2: Analyze each account and its classification. For example, Accounts Receivable represents amounts owed to the company by customers and is typically collected within one year, making it a Current Asset. Accumulated Depreciation is a contra-asset account that reduces the value of fixed assets and is not a liability. Prepaid Insurance is an asset because it represents a payment made in advance for future benefits, and it is usually classified as a Current Asset if the benefit is expected within one year. Common Stock represents ownership in the company and is classified under Equity, not as an asset.
Step 3: Evaluate the options provided in the problem. Option A correctly matches Accounts Receivable to Current Asset. Option B incorrectly classifies Accumulated Depreciation as a Current Liability. Option C incorrectly classifies Prepaid Insurance as a Long-term Liability. Option D incorrectly classifies Common Stock as a Current Asset.
Step 4: Confirm the correct answer. Based on the analysis, the correct classification is Option A: Accounts Receivable — Current Asset.
Step 5: Review the reasoning behind the classifications to ensure understanding. This involves recognizing the nature of each account and its expected usage or settlement timeframe, which determines its classification on the balance sheet.
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