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Classified Balance Sheet Components

Brian Krogol
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Alright, so let's dive a little bit into the concept of a classified balance sheet. So we've talked about a balance sheet before. Right? The balance sheet is what shows the assets liabilities and equity at a point in time. Right? This is at a point in time, it's a snapshot of the company that kind of just shows us at this moment how much cash do we have, How much inventory do we have? How much do we owe to our suppliers? How much is owned by our stockholders? Right, So it shows at that moment, uh the assets liabilities and equity. So what we're gonna do is we're gonna take our balance sheet, we're gonna take it a step further and call it a classified balance sheet when we're gonna split up our assets and liabilities into two categories. Okay. We we might have talked about this already a little but I just want to go through a little more details first. We have our current assets. Okay, Current assets, like is it's gonna be assets right? There's still assets, but they can they can or will be converted into cash within one year. Okay, so that's what defines a current asset. Current assets is generally cash, obviously because it's already cash or things like accounts receivable money owed from customers inventory. That's money that we have sitting in goods that were waiting to sell, we would expect to sell those within a year, generally. Okay, so things like that are going to be our current app. Alright, let's go on to long term assets. Well, long term assets, that's things that we're gonna use for multiple years. So it's when we're gonna use something for longer than one year. Okay, So this one year threshold, that's the cut off point for current versus long term. So these long term assets, that's going to be things like machinery, land buildings, patents that we might have on our product things. It's gonna last more than just one year. All right. The same thing with liabilities except well, the same, but the opposite right current liabilities. Well, this is money we have to pay within one year. There's gonna be some sort of outflow within the next year. Alright. And that's gonna be things like accounts payable or any sort of short term debt that we have, that we're gonna have to pay back soon. Okay, compare that to long term liabilities. And these are liabilities that will not be paid back for more than one year. Okay. So that could be like a long term loan that we have, maybe we got a loan from the bank for 20 years, something like that. That's gonna be a long term liability. Alright. And one last thing I want to note is that we're gonna present our current assets in order of liquidity. Okay. And we're gonna start with the most liquid. So this term liquidity, it just means how easily we can convert it into cash. So you can imagine that cash is already very liquid because it is cash. Alright. So we're gonna show them from most liquid to least liquid. And we're gonna start with cash. Cash is the most liquid. It is cash already. Okay. Generally we're gonna think that accounts receivable a our accounts receivable would be the second most liquid because that's money that we've lent to customers that maybe they have a 30 day pay period, they're gonna pay us pretty soon. Right. So A. R. O. I'm sorry, actually before A. R. I forgot about this little one, there's one that comes up every now and then, and it is Marketable Securities. Yeah, So I wanna put that one in here before A. R. Because marketable securities, this is something um this is like a a share of stock or a bond or some sort of investment that you made that could be sold very easily. Right? Marketable means it can be put on the market and the security is any kind of investment. So imagine you had a share of Apple stock that's very liquid, right? If you want to sell that share of apple stock, you could do that right away, You could get the price on google, you know what it's worth and you could sell it. Right, so marketable securities are very liquid there. Just a little less liquid than cash because cash is already cash. So after marketable Securities, that's where I'm gonna put a r. Okay, accounts receivable, that's you could imagine, right, the marketable securities are pretty liquid. We can just go and sell our shares of Apple stock a r well, we have to wait for the customers to pay us, right, the accounts receivable, we have to wait for the customers to pay us, but it's generally going to be pretty soon after a R. We're gonna put inventory. So inventory, this is like merchandise that we have just goods sitting in boxes in our warehouse waiting to sell. We would imagine that we're not gonna be buying goods to just sit in the warehouse for years and years. Right? We want to buy that stuff and sell it as quickly as possible to make money so that inventory is going to be pretty liquid as well. Finally, we're gonna have what's called prepaid expenses. We might have mentioned this before already. Prepaid expenses. This is basically when you pay an expense in advance. So let's say you got a insurance policy that's gonna last several years, but you paid it all up front. Well, that's still uh, an asset. Right, well, at least the current part of it, let's say it's gonna last for one year. Right? Because remember, current assets have to be one year. Well, these prepaid expenses are gonna be current assets, but it's gonna take all year for it to basically be converted into cash or converted into the equivalent of cash since we already paid it in advance. We're gonna spend more time on prepaid expenses. So don't get caught up on it right now. You're gonna learn a lot more about it. Um and it won't be as confusing once we get into it. Okay, so prepaid expenses, that is also a current asset, if it's something that we're gonna be uh using up within the next year. So this is the order of liquidity, their cash. Marketable securities a our inventory and prepaid expenses. Okay, So here I have a balance sheet for an example company, no real company here. But this is what you might see notice under our assets. We start with our current assets right here and then we go to our fixed assets, our long term assets to get to our total assets. Right? And notice that our current assets are shown in order of liquidity. We started with cash, then accounts receivable inventory, prepaid expenses in order noticed that marketable securities isn't there? Right, Well, this company doesn't have any marketable securities, so it's not listed if they didn't have any accounts receivable. Well, that wouldn't be listed, right, But we would still keep the same order of liquidity. Alright, so that's basically it notice here on the liability side, we also split it up current assets, long term assets. So this is a classified balance sheet because it splits up the assets and liabilities between current and long term. Cool. Pretty, pretty. Basic stuff. We've talked about a lot of that before, but let's go ahead and move on to the next video