In the classified balance sheet, prepaid expenses are reported in which section?

• A. Long-term assets (property, plant, and equipment)
• B. Current assets
• C. Stockholders’ equity
• D. Current liabilities

Answer: (B)

Verified step by step guidance

1. Understand the nature of prepaid expenses: Prepaid expenses represent payments made in advance for goods or services to be received in the future, such as prepaid insurance or rent.
2. Recall the classification criteria on a classified balance sheet: Assets are divided into current and long-term based on their liquidity and the time frame within which they will be used or converted to cash.
3. Determine the time frame for prepaid expenses: Since prepaid expenses will be used up or expire within one year or the operating cycle, they are considered short-term in nature.
4. Identify the appropriate section: Because prepaid expenses are expected to be consumed within one year, they are classified under current assets on the balance sheet.
5. Conclude that prepaid expenses are reported in the current assets section of the classified balance sheet, not under long-term assets, stockholders’ equity, or current liabilities.