On a classified balance sheet, subtotals are shown for current assets and current liabilities. What is the primary purpose of these subtotals?

• A. To calculate net income for the period
• B. To report only cash and cash equivalents
• C. To separate operating and non-operating items
• D. To distinguish between assets and liabilities expected to be realized or settled within one year and those that are long-term

Answer: (D)

Verified step by step guidance

1. Understand the concept of a classified balance sheet: A classified balance sheet organizes assets and liabilities into categories based on their liquidity or timing of settlement.
2. Recognize the purpose of subtotals for current assets and current liabilities: These subtotals help distinguish between short-term and long-term financial items.
3. Define current assets: Current assets are resources expected to be converted into cash, sold, or consumed within one year or the operating cycle, whichever is longer.
4. Define current liabilities: Current liabilities are obligations expected to be settled within one year or the operating cycle, whichever is longer.
5. Conclude the primary purpose: The subtotals for current assets and current liabilities are used to highlight the distinction between short-term and long-term items, aiding stakeholders in assessing liquidity and financial health.