Question

"One of a firm's assets is 270-day commercial paper that the firm intends to hold to maturity. One of its liabilities is a short position in a common stock, which the firm holds for trading purposes. How should this asset and this liability be classified on the firm's balance sheet

Answer 1

Answer:

The answer is that both should be classified as current asset.

Explanation:

The asset and the liability will be classified as current assets on the firm's balance sheet.

Current assets are assets that can be converted to cash or be sold within a year.  Examples are cash and cash equivalents, accounts receivable, inventory etc.

• The 270-day commercial paper is a cash-equivalent item. The maturity is 270 days which is less than 360 days(a year). This will be converted to cash in 270 days.
• The liability here is held for trading purposes and the position is short, meaning the firm has the intention of selling the security(common stock) within a year.