5.
2 • The Balance Sheet 135
prepared correctly, the total assets on the balance sheet equals the total liabilities and owner’s equity sections
of the balance sheet.
The classified balance sheet is considered or termed classified when the assets and liabilities within the
balance sheet are grouped into even smaller sections: current and noncurrent (see Figure 5.6). Both assets
and liabilities are broken down on the balance sheet into current and noncurrent classifications in order to
provide more detail and transparency as well as abide by the convention of reporting in descending order of
liquidity. Current assets are those that can be used or converted to cash within a year. Common examples of
current assets include cash, inventory, accounts receivable, and short-term investments. Assets that will be in
use longer than a year are considered noncurrent. Common examples of noncurrent assets include notes
receivable, machinery and equipment, buildings, and land.
Just as we noted a few key differences in the income statements based on the type of firm, you may also notice
a few slight differences in the balance sheet depending on the firm type. Clear Lake Sporting Goods is a
retailer. Thus, you will see that their inventory for resale on their balance sheet is simply called “Inventory.”
This is the goods they have purchased for resale but have not yet sold. A manufacturer, like Apple, Inc. in the
Link to Learning sections, will have a variety of inventory types including raw materials, work in progress, and
finished goods inventory. These represent the various states of the inventory (ready to use, partially complete,
and fully completed product). A service firm, on the other hand, may not have inventory at all. If it does, it may
be simple goods it uses to help deliver its service. For example, a cleaning company may keep an inventory of
cleaning supplies.
Figure 5.6 Graphical Representation of the Accounting Equation Both assets and liabilities are categorized as current and
noncurrent.
Clear Lake Sporting Goods has cash, accounts receivable, inventory, short-term investments, and equipment.
It rents its facilities, so it has no buildings on its balance sheets. Of all its assets, only the equipment is long
term. The assets section for Clear Lake’s classified balance sheet is shown in Figure 5.7.
Figure 5.7 Assets Section of Classified Balance Sheet
THINK IT THROUGH
Current and Noncurrent Assets
Visit the Apple, Inc. Annual Report (https://openstax.org/r/2020-doc-financial-annual-report) for 2020 and
locate the company’s balance sheet (the balance sheet begins on page 33). What types of current assets
136 5 • Financial Statements
does the company have? What types of noncurrent assets does it have? How has the total of each type of
asset changed over time?
Solution:
Apple reports cash and cash equivalents, marketable securities, accounts receivable, inventories, vendor
non-trade receivables, and “other” current assets on its balance sheet. The company’s current assets
decreased from $162,819 in 2019 to $143,713 in 2020. Apple reports marketable securities, property, plant
and equipment, and other noncurrent assets in the noncurrent asset section of its balance sheet. The
company’s noncurrent assets increased from $175,697 in 2019 to $180,175 in 2020. (Amounts are in
millions.)
We’ve covered the assets side of the accounting equation; now let’s turn our attention to the other side of the
equation and the other two sections of the balance sheet: liabilities and equity. Just like the assets section, the
liabilities section is broken down between current and noncurrent. Current liabilities are those that will be
due within a year. Common examples of current liabilities include accounts payable, wages payable, and
unearned revenue. Noncurrent liabilities are those that are due more than a year into the future. Notes
payable is a common noncurrent liability.
Clear Lake Sporting Goods has accounts payable and has collected payments from a few customers that it
hasn’t yet shipped its product to (unearned revenue). It also owes money on a note payable. Its accounts
payable and unearned revenue are both current liabilities. The note payable is not due for several years, thus
making it a noncurrent liability (see Figure 5.8).
Figure 5.8 Liability Section of Classified Balance Sheet
THINK IT THROUGH
Current and Noncurrent Liabilities
Visit the Apple, Inc. Annual Report (https://openstax.org/r/2020-doc-financial-annual-report) for 2020 and
locate its balance sheet (the balance sheet begins on page 33). What types of current and noncurrent
liabilities does the company have? How has the total of each type of liability changed over time?
Solution:
Apple has accounts payable, deferred revenue, commercial paper, and term debt listed as current liabilities.
Its current liabilities declined by only a small amount from 2019 to 2020 ($105,718 to $105,392).
The company has term debt and “other” listed as noncurrent liabilities, which increased from 2019 to 2020
($142,310 to $153,157). (Amounts are in millions.)
The stockholders’ equity section of the balance sheet for corporations contains two primary categories of
accounts. The first is contributed capital, which is funds paid in by owners. The second category is earned
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