Current and non-current, liquidity order, contra accounts net, the first ratio

Classified means sorted by time

A balance sheet lists what a company has and owes; a classified balance sheet sorts each list by when. Current assets are cash and whatever will become cash, or be used up, within a year of the balance-sheet date (or within the operating cycle, if that is longer); everything else is non-current. Current liabilities are due within the same window. The sort is what lets a reader — a bank, above all — see whether the cash coming in over the next year covers the cash going out.

Worked example — Northlake at its first 31 December

Adjusted balances after Module 5: Cash 54,800; Accounts Receivable 5,800; Supplies 2,150; Prepaid Insurance 5,500; Equipment 138,000 less Accumulated Amortization 2,500; Building 610,000 less Accumulated Amortization 2,250; Accounts Payable 21,050; Salaries Payable 4,700; Interest Payable 4,150; Unearned Revenue 40,500; Dividends Payable 8,000; Notes Payable 30,000 (due 2 December next year); Bank Loan Payable 400,000 (due 2031); Common Shares 300,000; Retained Earnings 3,100.

Northlake Nordic Centre Inc.
Balance Sheet
At 31 December

Assets
Current assets
  Cash                                          54,800
  Accounts receivable                            5,800
  Supplies                                       2,150
  Prepaid insurance                              5,500
  Total current assets                          68,250
Property, plant and equipment
  Equipment                          138,000
  Less accumulated amortization       (2,500)  135,500
  Building                           610,000
  Less accumulated amortization       (2,250)  607,750
  Total property, plant and equipment          743,250
Total assets                                   811,500

Liabilities
Current liabilities
  Accounts payable                              21,050
  Salaries payable                               4,700
  Interest payable                               4,150
  Unearned revenue                              40,500
  Dividends payable                              8,000
  Notes payable                                 30,000
  Total current liabilities                    108,400
Long-term liabilities
  Bank loan payable                            400,000
Total liabilities                              508,400

Shareholders' equity
  Common shares                                300,000
  Retained earnings                              3,100
  Total shareholders' equity                   303,100
Total liabilities and shareholders' equity     811,500

Four presentation rules are at work. Liquidity order: current assets run from cash to the things farthest from cash — cash, receivables, (inventory in Module 8), supplies, prepaids. Prepaid insurance is current because it will be used up within the year, even though it never becomes cash. Contra accounts net: each PP&E item shows cost, accumulated amortization and the carrying amount — never the cost alone, never the net alone (Module 7 adds A/R less its allowance the same way). Land (Module 11) would come first in PP&E and carry no contra line. The one-year test on the liabilities: the 30,000 note due 2 December next year is within twelve months, so it is current; the bank loan due 2031 is not; had the note been due in eighteen months it would sit with the loan. When a loan has a principal instalment due within the year, that slice is split out as Current portion of bank loan (L6.2, L6.3) and the rest stays long-term.

Working capital and the current ratio

$$\text{Working capital}=\text{Current assets}-\text{Current liabilities}=68,250-108,400=-40,150$$

$$\text{Current ratio}=\frac{\text{Current assets}}{\text{Current liabilities}}=\frac{68,250}{108,400}=0.63$$

For every dollar due within a year Northlake holds 63 cents of current assets. Read cold, that is alarming; read with the case, it is a ski centre on 31 December. The largest current liability, Unearned Revenue 40,500, will be settled by grooming trails, not by paying cash — it is three months of a season whose cash has already been collected. Take it out and the ratio is $68,250÷67,900=1.01$. The dividend payable and the note are one-time items, and the season's day-pass and rental cash is about to arrive. A number on a balance sheet is a fact; what it means takes the case — which is why the paper pairs the ratio with an explain-it question.