Final answer:
To classify an asset as current or non-current, a company must consider the expected time period within which the asset is likely to be converted into cash, with current assets being liquidated within one year or the operating cycle, and non-current assets being long-term investments not expected to be liquidated within this period.
Step-by-step explanation:
To determine if an asset should be reported as a current asset or a non-current asset, a company should use the criteria of the expected time period within which the asset is likely to be converted into cash, sold, or consumed. Current assets are those which the company expects to convert to cash or use up within one year or its operating cycle, whichever is longer. Examples of current assets include cash, accounts receivable, inventory, and other assets that are expected to be liquidated or turned into cash in the near term.
On the other hand, non-current assets, also known as long-term investments, include assets like land, buildings, equipment, or any other investments that are not expected to be liquidated within the company's operating cycle or one year. These are assets purchased for long-term use and are not intended to be converted into cash in the short term. Companies must evaluate liquidity, the rate of return, and the risk associated with each asset to classify them correctly on the balance sheet.
An asset with low liquidity, such as real estate or fine art, is likely a non-current asset, while high liquidity assets, like treasury bills or short-term certificates of deposit, would fall under current assets. The categorization of these assets is crucial for assessing a company's financial health and operational efficiency.