Classification of Assets as Current Assets
An asset is a resource within a company’s control through which the company expects to get economic benefits in the future. An asset comes into being due to the past events of a company. Current and fixed assets are the two main classifications of assets. Current assets are assets that form part of the operating cycle of the organization and a company can easily convert them to cash within one year. On the other hand, fixed assets are assets within an organization that are vital for the smooth operations of the business and the company is likely to use them for a long period. Fixed assets pose a problem in inventory valuation as they do not change their form or use up completely in the short term (Berry, Jarvis & Jarvis, 2005).
A company classifies assets as current or fixed assets depending on how the company uses the assets. Therefore, a current asset of one organization may be a fixed asset of a different organization (Duchac, Reeve & Warren, 2006). A manufacturing company and a vehicle dealership may classify a motor vehicle differently in their inventory. For the manufacturing company, the motor vehicle is a fixed asset as it may help in the movement of goods. However, a vehicle dealership would classify the same motor vehicle as a current asset. This is because the sale of motor vehicles is the principal aim of the existence of the vehicle dealership.
Therefore, Johnson Electronics should classify assets as current assets depending on the use of the assets within the company. The company should classify products that it manufactures or buys to sell them to make a profit, as current assets. However, the company should classify other assets that help in the day-to-day running of the company as fixed assets.
Contingent Liability
A contingent liability is an organization’s obligation whose outcome is dependent on a certain future event. Therefore, it is difficult to determine with certainty the actual value of the contingent liability. Organizations can only estimate contingent liability since they may have no control of the outcome of future events. The critical accounting issue about contingent liabilities is whether to record the contingent liabilities and in what amounts should the company record the contingent liabilities (Porter & Norton, 2012).
A company needs to record all contingent liabilities as contingent liabilities ultimately affect the financial position and profitability of the company. Recording contingent liability enables the company to take measures to safeguard its financial position should the liability have adverse effects on the company. If a company is unable to estimate the financial value of the liability, the company should at least disclose the contingent liability in its financial statement. However, the company cannot record the contingent liability in the balance since it is difficult to determine the exact value of the contingent liability. Recording contingent liabilities in either the financial statement or balance sheet of the company enables help investors to make an informed decision on whether to invest in the company (Porter & Norton, 2012).
Therefore, Baxter Controls should record all contingent liabilities in either the financial statement or the balance sheet of the company. Some of the contingent liabilities that the company may record in the balance sheet include warrantees, coupons, and legal claims that may have adverse effects on the company’s financial position (Porter & Norton, 2012). Baxter Controls should also record other contingent liabilities that arise from the unique nature of the company’s operations.
Reference
Berry, A., Jarvis, P. & Jarvis, R. (2005). Accounting in a business context. Belmont, CA: Cengage Learning.
Duchac, J.E., Reeve, J.M. & Warren, C.S. (2006). Financial accounting: An integrated statements approach. Belmont, CA: Cengage Learning.
Porter, G.A. & Norton, C.L. (2012). Using financial accounting information: The alternative to debits and credits. Belmont CA: Cengage Learning.